Is Bankruptcy the Right Move?

What is a Bankruptcy?

Bankruptcy allows people in debt to start over with a clean slate, either with some type of asset liquidation, or establishing a new payment plan to pay debts. Filing for Bankruptcy is an option that should only be used as a last resort. Before deciding to file, you should contact your creditors and try to explain your situation. Inquire about negotiating a new loan settlement or establish a new payment plan with lower payments. You should also seriously consider talking to or hiring a bankruptcy lawyer or professional to help decide if filling for bankruptcy is really the option for you.

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Analyze your Debt

Something to consider is that not all types of debt can be discarded, erased or forgiven. You should familiarize yourself with the types of debt that are applicable to be forgiven or erased. If most of the debt that you have is categorized as unforgivable, then maybe filing for bankruptcy isn’t the right decision for you. Below are the types of debt that can not be erased.

  • Alimony
  • Child support
  • Loans acquired unlawfully
  • Debts from personally injury incurred while driving intoxicated
  • Some student loans
  • Some taxes
  • Debts from willful and malicious injuries to person or property
  • Some debts incurred in the six months prior to filing bankruptcy

The goal to bankruptcy proceedings is to seize and sell of your valuable assets to pay off your debts, but there are some assets that you might have that are protected by laws. Depending on what type of bankruptcy that you’re filling for certain assets may be completely or partially protected up to a certain amount. For example, there might be at automobile exemption of $5,000, meaning that you could keep a $4,000 car but not a $20,000 one. Common protected assets are cars, wedding rings, and your home.

Types of Bankruptcy

Bankruptcy courts and laws work together in order to protect troubled businesses as well as helps in providing orderly distribution to business creditors through different means including reorganization or liquidation. The procedures that need to be followed in a bankruptcy court are covered under Title II of the Bankruptcy Code. Most cases that are filed fall under the three main chapters of the Bankruptcy Code and these are Chapters 7, 11 and 13.

  • Individuals and businesses may file for Chapter 7. Property may be liquidated to pay off creditors. Secured debt may be eliminated, or you have the option of allowing the property to be repossessed or paying the creditor a lump sum equal to the current value of the property. Your income must be below a certain level to qualify for Chapter 7.[5]
  • Chapter 13 is also known as “wage earner” bankruptcy. Under Chapter 13, if you have a reliable source of income, you can propose a repayment plan to your creditors that pays them back over the next three to five years. Your debts must be below $1,149,525 in secured debt and $383,175 in unsecured debt.[6] Note that the amount received by the creditors is established by your income after bankruptcy, not the amount of debt owed.
  • Municipalities, such as cities, towns, villages, taxing districts, municipal utilities, and school districts can reorganize under Chapter 9.[7]
  • Businesses can reorganize under Chapter 11 or liquidate under Chapter 7.[8]
  • Chapter 12 is similar to Chapter 13. It is reserved for businesses for which 80% or more of debt is from the operation of a family farm or fishery.[9]

In technical terms, the US district courts are authorized to handle bankruptcy cases, though each such district needs to refer bankruptcy matters to the bankruptcy court. Initially at least, all matters relating to bankruptcy are handled by the bankruptcy court.

However, if circumstances are unusual, the district court can withdraw the reference or take the bankruptcy case away from the bankruptcy court and decide upon the matter itself. Most of the bankruptcy matters are handled by a bankruptcy judge sitting in a bankruptcy court who may pass decisions on these matters which will be final except for appeals to the district judge who may review such decisions.

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