The Truth About Bankruptcy

Bankruptcy is a way for individuals to find debt relief through the legal process. The extent of the relief that an individual is entitled to is based on a number of factors such as income, amount of debt, and current financial situation. The bankruptcy "code" has been written by the federal government and is overseen by district bankruptcy courts. The bankruptcy code includes several "chapters".

 

These chapters are essentially guidelines under which an individual files for bankruptcy and each chapter has slightly different rules about how the person's debt is handled – from a repayment plan to complete elimination of the existing debt. There are six primary types of bankruptcy filings – Chapter 7, Chapter 13, Chapter 11, Chapter 12, Chapter 9, and Chapter 15. The type of bankruptcy a person files is generally referred to by the chapter under which the case has been filed.

 

A Word About Creditors and Credit

A creditor is an individual or business to which someone owes money. Creditors loan money that is both secured and unsecured depending on the situation. For instance, a home loan is a secured loan because the home is the collateral for the loan. Cars, boats, electronic equipment and other large-ticked purchases are often secured. Personal loans can also be secured.

 

A person might place items that they own as collateral for a personal loan. Again, a house, car, jewelry or other large-ticket item might be used as collateral for a personal loan. Credit cards are generally unsecured loans. A person applying for a credit card does not have to secure their application with real property. How, and if, creditors will receive payment after an individual has filed for bankruptcy depends on the type of bankruptcy the individual qualifies for.

Changes in Bankruptcy Law

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 changed the way that people file for bankruptcy. The federal government found that far too many consumers were using bankruptcy as a way to avoid debt and determined that as many people as possible should be forced to pay their debt whenever possible.

 

This means that the primary focus of the law was to eliminate frivolous bankruptcy filings by requiring that any individual with enough disposable income to do so should file Chapter 13 bankruptcy rather than Chapter 7 bankruptcy. Chapter 13 bankruptcy requires the individual to submit to a repayment plan designed to repay creditors as much of what they are owed as possible. Chapter 7 bankruptcy allows individuals to wipe out most, if not all, of their debt.

 

The new law has made it more difficult for filers to file Chapter 7 bankruptcy. In order to file Chapter 7, an individual is required to meet certain income criteria. If the court finds that there is enough disposable income to repay the debt, the individual must file Chapter 13, not Chapter 7.

 

A Word About Disposable Income

Making bankruptcy filings more difficult is the requirement that all of an individual's disposable income be used to repay creditors. Before the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 took effect, bankruptcy filers were able to submit their own repayment plans for consideration. The changes in the bankruptcy laws require that an individual use 100% percent of his or her disposable income to repay debts.

 

Disposable income is that part of a person's income that is left over after necessary expenses such as food, housing, utilities, and care and house payments have been met. Certainly, there are allowances for clothing and other basic expenses, but the restrictions are far greater than they once were. The idea behind the law, in part, was to make filing for bankruptcy more of a punishment than it once was.

 

Non-dischargeable Debts

Many people are under the impression that bankruptcy eliminates all of their debt. The reality is that Chapter 13 bankruptcy helps consumers repay all or part of their debt under the protection and guidance of the court and Chapter 7 bankruptcy requires the sale of assets to repay creditors.

 

At the end of the bankruptcy proceedings, which can take up to five years in the case of a Chapter 13 filing, debts are discharged, meaning they are considered paid or satisfied. However, some debts cannot be discharged. Family law debts such as back child support and alimony cannot be eliminated through bankruptcy. Student loan debt also cannot be wiped out by filing bankruptcy.

 

Because filing bankruptcy is serious business and will severely impact credit for years to come, consumers should always seek the advice of a qualified bankruptcy attorney before filing. Individuals who list the majority of their debt as student loans or another form of non-dischargeable debt might want to consider other options.