Filing Bankruptcy May Be the Best Solution for Debt Relief

Bankruptcy Information

You may really want to pay off your debt. Unfortunately, this is not always possible. Sometimes unforeseen circumstances happen and despite all your efforts to pay your debts, you simply can’t, not now and not in the foreseeable future. Bankruptcy is designed for people trapped in severe financial crisis. If you find yourself in these circumstances, bankruptcy may offer you a fresh start by reducing or eliminating debt. Bankruptcy is a federal court process which will help you to eliminate your debts or to create a repayment plan under the protection of the bankruptcy court. Most bankruptcy petitions are voluntary. Make sure to speak with a bankruptcy attorney or specialist for information on unfiled taxes in bankruptcy because many people are confused about what to do with this issue.

Bankruptcy Filing - Last Resort

The consequences of bankruptcy are severe and long term. Filing for personal bankruptcy should be a last resort and should not be taken lightly. Get a competent financial expert to first look at your situation to determine if bankruptcy is the best solution for you.

Purpose

The main purpose of bankruptcy is to allow you to get a financial fresh start by relieving most debts and by repaying creditors using an approach that is supervised by the courts and agreed-to by the creditors.

If You File Bankruptcy

Deciding to file bankruptcy is a complicated decision. You should consult with a bankruptcy lawyer, bankruptcy specialist or financial advisor to determine if you want to file bankruptcy. You may be headed for bankruptcy if you meet some or all of the following criteria.

• No health insurance or inadequate coverage
• Maxed out credit cards
• Borrowing money to pay for items you used to pay for with cash
• Paying only the minimum balance on your credit cards
• Charging more than you can afford to pay off each month
• More than one home equity loan
• No emergency fund – living from paycheck to paycheck with little or no savings for emergencies
• Tax lien on your home
• Pending foreclosure on your home
• Repossession of a car or other item
• You are unsure of the what you owe because you have been ignoring it or are afraid

These are signs that you've lost your grip on your financial situation. Take them seriously.

Bankruptcy Attorney

If you are thinking about bankruptcy, consult a qualified, well-informed and experienced bankruptcy attorney so s/he can explain the law in detail.

Overview of the 2005 New Bankruptcy Law Reform

It used to be quite easy to file for bankruptcy. However, stricter, new bankruptcy laws went into effect on October 17, 2005 making it much more difficult to qualify for bankruptcy protection. The new law is called “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” and is very complex. The main intent of bankruptcy reform is to prevent abuses of the law, require people who can afford to make some payments towards their debt, to make these payments, while still affording them the right to have the rest of their debt erased. Here are a few highlights:

Credit Counseling

The new law requires individual debtors to go through credit counseling within 180 days before filing for bankruptcy relief and then, after filing, to complete a financial management instructional course. In many cases, this has been missing in the debtor's life and will help them tremendously in understanding the situation they are in and how they can do a better job of managing money in the future. The U.S. Department of Justice maintains a list of approved credit counseling agencies.

Domicile and Homestead

You are limited in the assets you can protect from creditors. You cannot:

• Invest them in a house within about 3 years of filing ($125,000)
• Spend non-exempt assets on improvements to your residence within 10 years of filing with the intent to keep creditors from taking them
• Move to a state with better exemptions within 730 days of filing

There is one exception - an absolute cap of $125,000 on the homestead exemption if you are found to have engaged in bankruptcy abuse and certain criminal acts, intentional torts, and willful or reckless misconduct.

Proof of Income Under Oath

Debtors must provide proof of income to the trustee via a copy of a tax return or transcript of a tax return, for the period for which the return was most recently filed. This is followed by a meeting where the debtor is questioned under oath about his/her financial affairs by creditors, a trustee, examiner, or the United States trustee.

Retirement Assets

Exempts monies held in retirement funds from the bankruptcy estate. This means that creditors cannot collect this money. There is one exception - It allows creditors to collect money from retirement funds that are in excess of one million dollars and are from direct contributions and earnings on contributions made to an IRA or a Roth IRA.

Special Accommodations

The new income test for bankruptcy applicants has special provisions for active-duty service members, low-income veterans and those with serious medical conditions.

Residential Leases

There is a new provision that will allow a landlord to bypass the automatic stay and go forward with a residential eviction of a tenant.

Child Support / Alimony

Domestic support obligations which are due after a case is filed must be current for a plan to be approved. 

Types of Bankruptcy

The 2005 act mainly impacts consumer bankruptcy, however, it also has provisions that affect corporations, farmers and small businesses. Below is a quick overview of the types of bankruptcy proceedings allowed by U.S. law that have had significant changes under the new bankruptcy reform act: Chapter 7, 11, 12 and 13.

Chapter 7 Bankruptcy

Liquidation

A filing of bankruptcy Chapter 7 is called "liquidation" and is the most common type of bankruptcy filing. Liquidation involves the appointment of a court-appointed trustee who assumes responsibility of the assets of the debtor, sells them and with the cash, distributes the proceeds to the creditors. This is subject to the debtor’s rights to retain certain exempt property. Chapter 7 results in the forgiveness of all debt, EXCEPT child support, taxes, and certain types of judgments.

Under the new law, it is now more difficult for certain individuals to discharge all debt. Individuals will need to demonstrate whether or not they have the ability to repay some or all of their debt. If the court determines that the consumer does have the ability to repay, s/he will be forced into Chapter 13, as opposed to Chapter 7.

If the filer’s income is below the median income in his/her state (based on the prior six months), s/he is not required to show eligibility and may stay in Chapter 7. However, for those earning more than the median state income, a means test is used. This test is used to identify debtors who have the financial ability to pay some money to their creditors. The test works as follows, but is actually a lot more complex. You should work with a qualified, competent and experienced bankruptcy attorney to work through the details.

TEST 1

Is the family earning above the average income for your state?

As an example, below are some US averages for 2004.

• Family of one = $18,762
• Family of two = $39,755
• Family of three = $48,957
• Family of four = $54,338
• Family of five = $50,905

If the answer is:

No, Chapter 7 can be filed

Yes, Proceed to TEST 2

TEST 2

Do you have excess monthly income of more than $166.66 per month to pay $10,000 of debt over 5 years?

If the answer is:

No, Proceed to TEST 3

Yes, Chapter 7 cannot be filed but Chapter 13 may be filed

TEST 3

Do you have excess income of greater than $100 per month to pay over the next 60 months at least 25% of your unsecured debt?

If the answer is:

No, You can file Chapter 7

Yes, Chapter 7 cannot be filed but Chapter 13 may be filed.

However, the figures used by the court for living expenses are not what you think your actual documented living expenses are, but rather the schedules used by the IRS in the collection of taxes. This may be a huge problem for a lot of individuals because their household budget will not match the harsher rules imposed by the IRS approved amounts. So even though you may think you can file for Chapter 7 because you don't have $100 a month to spare, the court may rule otherwise and still force you into Chapter 13 because some of your actual expenses may be disallowed.

Chapter 11 Bankruptcy

Reorganization

Chapter 11 is a reorganization chapter typically filed by corporations because corporations cannot file a Chapter 13 to reorganize. This Chapter is essentially unchanged by the Reform Act. It allows a business to develop a recovery plan and holds off creditors while it is being implemented. It is designed to protect businesses whose debt troubles can be corrected since it assumes the business can be rehabilitated by using a viable recovery plan and a modified payment schedule.

Chapter 11 can also be filed by an individual, especially one who does not meet the debt limitations imposed under Chapter 13. However, individuals rarely use Chapter 11 because it is very expensive.

This plan usually pays each unsecured or under-secured creditor more than it would receive under Chapter 7 liquidation. No statutory limit exists on the length of the repayment period.

The US bankruptcy court judge has the authority to approve a plan. Normally the court does not appoint a trustee to manage the business. The same people carry on managing the business but using the new plan. The only exception is that the bankruptcy judge supervises and approves certain expenditures and business decisions. Additionally, the debtor receives its discharge upon confirmation of the plan.

Chapter 12 Bankruptcy

Adjustment of Debts of a Family Farmer with Regular Annual Income

Chapter 12 bankruptcy was enacted to specifically meet the needs of financially distressed family farmers. The Reform Act makes Chapter 12 bankruptcy permanent while adding family fishermen. The primary purpose is to allow them to reorganize their debts and keep their farms. Chapter 12 allows the family farmer to repay his debts through a plan not to exceed five years. Chapter 12 has similar provisions as Chapter 13 but provides relief for those whose debt limitations exceed a Chapter 13 filing.

Chapter 13 Bankruptcy

Adjustment of Debts (aka Wage Earner Chapter)

Chapter 13 is named Adjustment of Debts of an Individual with Regular Income. It is intended for the individual debtor who has a regular source of income, not necessarily wages. Most of the time filing for Chapter 13 is preferable to filing Chapter 7 bankruptcy because it allows the debtor to keep their property and to propose a plan to repay creditors over time – usually three to five years. The court must approve your repayment plan and your budget. A trustee will be appointed to collect the payments from you, pay your creditors, and make sure you live up to the terms of your repayment plan.

Chapter 13 is also used when individuals do not qualify for Chapter 7 relief under the means test.

One difference from Chapter 7 is that when Chapter 13 is used, the debtor does not receive an immediate release from debts. The debtor must finish all payments required under the plan before the release is received. However, the debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The release of debts is also wider (more debts are eliminated) under Chapter 13 than under Chapter 7.

Under Chapter 13, up to 15% of your income can be given to charity. Some say this is a loophole that allows individuals who may be just over the threshold of having to file Chapter 13 to drop their income level down low enough to be eligible to file Chapter 7.

You must be extremely diligent about making your payments. If you miss any payments at all that are due under your plan, your case will be dismissed by the Court.

While going through bankruptcy - or after you have been discharged - you can still get a bankruptcy bank account alternative which is specifically designed to be available to bankrupts and undischarged bankrupts.