For anyone who has ever felt lost under a mountain of debt, bankruptcy may be the answer. By liquidating assets to pay off current debt or developing a reasonable repayment plan, individuals and businesses whose debt exceeds their ability to pay may be able to wipe out or restructure much of their debt through the federal court system.
There are six chapters of bankruptcy, three of which are primary:
- Chapter 7 (Liquidation of Assets)
- Chapter 9 (Municipalities)
- Chapter 11 (Reorganization)
- Chapter 12 (Farmer or Fishermen)
- Chapter 13 (Individual Debt Adjustment)
- Chapter 15 (Ancillary and Other)
The decision to file for bankruptcy should not be taken lightly. Although a bankruptcy discharge releases you from personal liability for specific types of debts and stops debt collection activities, home foreclosures, repossessions and wage garnishments, there are disadvantages:
- Ruins your credit for the next 7 to 10 years
- Loss of credit cards and other personal items
- Inability to obtain a home or other loans
- Not all debts – such as school loans, child support, and taxes – are eliminated
- Bankruptcy is not free, you must pay a fee
- General embarrassment of going bankrupt
Consider carefully before you decide to choose bankruptcy as an option for relieving your debt.
Chapter 7 Bankruptcy
Under Chapter 7 Bankruptcy, a court-appointed trustee sells all of your non-exempt assets (such as family treasures; bank account, stocks, and bonds; a second home or vehicle). Exempt assets may include valuables such as a primary home, work tools, and pension plan.
The basic steps to filing bankruptcy under Chapter 7 begin when you file a petition plus these 10 items with the bankruptcy court in your area:
- Most recent tax return
- Schedule of assets and liabilities
- Current home and expenditures (including anticipated increase in expenditures)
- Statement of financial affairs
- List of executable contracts and leases
- Certificate of credit counseling
- Copy of debt repayment plan developed during counseling
- Proof of payment from employer
- Statement of monthly net income (including anticipated increases)
- Interest in federal or state qualified education or tuition accounts
Additionally, you must provide the court with:
- A list of creditors and the amount and reason for the debt
- How often you are paid, how much, and from whom
- A list of items you own
- A detailed list of your monthly living expenses (such as food, shelter, and medicine)
You will be charged a filing fee (currently $245), an administrative fee ($46), and a trustee surcharge ($15). If you have difficulty paying, the court may arrange an installment plan.
Within three to six weeks after filing, you will meet with the trustee and your creditors to answer questions. It is then up to the trustee to file a decision within 10 days after this meeting.
Chapter 11 Bankruptcy
Although businesses primarily use Chapter 11 to continue to operate while repaying creditors based on a workable repayment plan, individuals may file bankruptcy under this chapter as well. The purpose is to submit a plan for reorganization, which the court will approve or disapprove, and to:
- Repay and discharge certain debts
- Terminate contracts and leases
- Recover assets
- Rescale operations to return to profitability
As in Chapter 7, you must file a petition along with the previously listed required documents. In addition, you must submit a disclosure statement and a plan of reorganization. Current fees for filing under Chapter 11 include a $1000 filing fee and a $46 administrative fee.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy offers individuals some advantages over filing Chapter 7 because it:
- Can save your home from foreclosure
- Allows you to reschedule secured debts which may lower payments
- May protect you against consumer debts
- May protect co-signers
- Is similar to a consolidation loan – you make restitution to a trustee who distributes your payments to creditors
As before, you must file a petition along with the required documents. Current filing costs include a filing fee ($235) and an administrative fee ($46). The trustee will hold a meeting within three to seven weeks after filing to address questions and determine an outcome.
If you are considering bankruptcy, be sure to take time and reflect on the effect it will have on your life. Use bankruptcy only when there is no other solution. For additional information, check out the Federal Court publication Bankruptcy Basics.