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Claiming Bankruptcy : What You Must Know Before You File

Updated on March 18, 2010

Claiming Bankruptcy and Reducing or Eliminating Your Debts

Claiming bankruptcy in the US has gotten more difficult for individuals recently, because some people were taking advantage of the process and benefiting from loan forgiveness when they could have actually produced the money to pay their debts.

For example, some people who are in over their heads in terms of debts can still claw their way back out with loan consolidation or bad credit refinance help, which lowers monthly credit card and consumer debt payments to levels you can afford, and forgives a portion of the debts. This will create a ding on your credit score, but not nearly as bad as claiming bankruptcy would.

However, though the personal bankruptcy process has gotten more involved with more stringent requirements, people who are genuinely in over their heads can still successfully qualify and file for personal bankruptcy.

For the most part, you can file for one of two types of bankruptcy proceedings - each are distinct with its own advantage and drawbacks. They are called Chapter 7 or Chapter 13 bankruptcy, and a personal bankruptcy lawyer can help you understand the specifics to your situation, but here are the basics.


Should I Claim Chapter 7 or Chapter 13 Personal Bankruptcy?

Chapter 7 bankruptcy will involve a complete (excluding your primary home and a few other exemptions) liquidation of every non-necessary asset, which will go to pay as much of your debts as the proceeds will allow, and then all your remaining debt is forgiven and you can start over and take charge of your financial situation again.

In Chapter 13 bankruptcy (which is the same process that many struggling companies go through) the process is called reorganization, and the bankruptcy court will lay out a payment plan for you to follow and pay to the court, which will then disperse them. It will also place financial restrictions on you, though Chapter 13 personal bankruptcy will allow you to keep your assets that might have been non-exempt under Chapter 7, like a second home.

The whole process under Chapter 13 can last three to five years, but you will be able to pay down much of your debt this way, which is more fair for the lenders, and the remaining loans will be forgiven at the end of the time period if you have followed the rules.


Steps to Claim Personal Bankruptcy

The first step to claiming bankruptcy is to get an inventory of all your assets (house, savings accounts, personal possessions, cars, etc) as well as all outstanding debts you owe (credit card bills, mortgage payments, car notes). Also compile a list of what bills are due, and when.

Then there are required legal bankruptcy forms available at your state's courthouses, plus the filing fee of a couple hundred dollars, plus a proposed repayment plan of your own if you are filing for Chapter 13 bankruptcy.

Once the court records your filing, creditors will be prevented from contacting you or trying to reclaim their property until the court decides on your case. For chapter 7 bankruptcy, then there will be a creditor and debtor meeting, with the court acting as negotiator to settle any objections between you and your creditors. If the court agrees that you are a suitable candidate for claiming bankruptcy, your debts will be discharged within a few months, albeit with a red flag on your credit report for the next seven years.

Claiming personal bankruptcy under Chapter 13 is understandably a little more complicated - you will attend a confirmation hearing and the judge will approve or reject the payment plan you have made for yourself. Once you have a bankruptcy court approved plan, you will make monthly or twice a month payments to your creditors for the next three to five years. Though the debts do not go away until the multi-year time frame is up, you will still be protected from debt-related lawsuits, attempts to garnish your wages, and calls from creditors as long as you are following the plan.

If you're struggling or unable to make regular payments, whether through unexpected expenses, losing your job, or just poor financial planning, claiming bankruptcy is a legitimate approach to easing your financial stresses and getting your life back in your control.


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