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Bankruptcy: What and Why

It is a word that everyone has heard and shudders to consider. But what actually happens and what it actually is are largely undefined in the public mind. To relieve some of that anxiety, here is an overview of the types of bankruptcy and how they can potentially help your situation. Bankruptcy exists as two types: the first requires individuals to sell their assets in order to pay the debt and the second requires individuals to make payments, without the sale of assets, over the course of a specified period of time to pay off the debt.

The first type of bankruptcy is known as a Chapter 7 bankruptcy. Filed either by individuals or businesses there are four criteria that must be met in order to file. The first criterion is that income must be at or below the median monthly income for your particular area. If your income is above the median, the second criterion is that you must calculate whether you have sufficient disposable income to repay unsecured debts over a five year period by subtracting the allowed expenses and required payments from your monthly income. The third criterion is that if you have filed for Chapter 7 bankruptcy in the last eight years or Chapter 13 bankruptcy in the last six years you cannot file for bankruptcy again. And the fourth criterion is that if a previous bankruptcy case, either Chapter 7 or Chapter 13, was dismissed within the last 180 days because you violated a court order, your filing was fraudulent, or you requested the dismissal, you cannot file for Chapter 7 bankruptcy.

The second type of bankruptcy is referred to as Chapter 13 bankruptcy. In order to file for Chapter 13, you must have a reliable source of income. This is required because in order to file you must submit a repayment plan that will have all of your debts paid off within three to five years. The amount to be repaid during that time is determined based on income and the amount of debt. However, there are limits to how much debt you can have. In order to file Chapter 13 you may not exceed $1,010,650 in secured debt and $336,900 in unsecured debt. For secured debts, where a possession is the direct object of the debt such as a car as the object of a car loan, Chapter 13 allows you to make up missed payments by incorporating them into your repayment plan.

The question of whether or not to file for bankruptcy boils down to whether or not the type of debt you have will be benefited by doing so. If you have credit card or similar unsecured debt, meaning the creditor does not have your property as collateral, then bankruptcy will most likely be very helpful in eliminating it, or at least getting rid of the majority of it. In fact, that is what it was designed to do. If you have debts like these, bankruptcy usually allows you to clear those debts in order to focus on the debts that it will not erase.

The types of debts that bankruptcy will not erase are tax debts, student loans, any court ordered payments like alimony or child support, and any secured debts where the creditor does have the right to repossess your property for failure to pay. After you file bankruptcy, all of these debts will remain. The court ordered payments must be factored into your repayment plan under Chapter 13. Student loans and tax debt are possible to be discharged, but only under extremely rare circumstances and only if you fulfill extremely difficult to prove criteria.

No two bankruptcy cases are the same. With that in mind you should always consult a licensed attorney before making any decisions regarding filing for bankruptcy, but this information will give you a place to start when determining whether or not you should consider the possibility that bankruptcy may be in your best interest.

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