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Understanding Bankruptcy

Being deep in debt is tough. Life can feel like you’re falling but don’t know when you’ll hit the ground. There’s a lot of stigma around bankruptcy. However, many extremely successful businesspeople, including Walt Disney and Henry Ford, have declared bankruptcy. Some have even made it to the White House after a bankruptcy ¾ Abraham Lincoln declared in 1833 and later became president in 1861. These men knew that bankruptcy doesn’t mean total failure; it means relief.

What Is Bankruptcy?

Bankruptcy is codified in the United States Code, Title 11. It presents you with a chance to “start from scratch” financially without being totally ruined. Depending on how you file, your creditors will either be satisfied through a payment plan or a fraction of your non-exempt assets. Afterward, they will be legally bound not to pursue you for any debt you held prior to your discharge.

Make Sure Bankruptcy Is Your Best Option

Although filing for bankruptcy can be a relief, it also more or less torpedoes your credit score down. Before you file, it’s best to make sure you’ve exhausted all your options.

  • Sell Your Stuff: Do you have any assets you can sell that would be enough to pay off your debts? If you do, this route will be more work, but it may allow you to keep more than a Chapter 7 filing.
  • Settle: If you’re already past due on some accounts, have you tried negotiating settlements with your creditors? Many collection agencies are willing to work with you to take what they can get.
  • Go to Debt Counseling: Debt counselors know how to negotiate with creditors and may be able to lower your liabilities to manageable amounts.

The Two Types of Bankruptcy

There are two types of bankruptcy that typically apply in personal cases. Chapter 13 bankruptcy involves a debtor presenting a court with a proposed payment plan to settle debts. While the court decides to accept or reject the proposal, the debtor immediately begins making monthly payments according to the plan. If the court accepts the plan, it will determine how to disburse the payments to creditors. Once the plan is complete, the debtor’s debts are discharged. A Chapter 13 bankruptcy will remain on your credit report for seven years.

In a Chapter 7 bankruptcy, a debtor discloses all of their assets. Some assets, depending on state laws, are exempt, suach as a modest primary home or family car. Nonexempt assets will be liquidated (sold) and the proceeds will be divided among creditors by the court. Once this process is complete, the debtor is discharged of his or her debts. A Chapter 7 bankruptcy takes 10 years to fall off your credit report.

In 2005, a “means test” was added to U.S. bankruptcy law. If your annualized income exceeds the median for the area you live in, the court will find that you have the means to pay a substantial portion of your debt. In this case, you cannot file for Chapter 7 except in very particular situations.

Filing

The filing process will differ depending on which chapter is appropriate for your situation. Either way, you’re looking at a very complex process involving a lot of paperwork. It’s worthwhile to hire an affordable and reliable lawyer to help you decide which is best and then get you through the basics. Remember, although bankruptcy can feel embarrassing, it’s really a fresh start. You can pat yourself on the back for taking the first step toward getting your finances on track.

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