With the ongoing financial crisis looking up for many people, one would expect the need for bankruptcy protection to be reduced. In fact this is not true. Many families have been struggling through the initial crisis only to be hit by unforeseen problems that push them closer to bankruptcy. A lot of the myths surrounding the subject of bankruptcy make people too hesitant to take advantage of the process. They continue to live with the stress of unmanageable debt when the laws provide workable solutions.
This article will answer some of the questions about bankruptcy from a debtor’s point of view . The data presented here is derived from individuals who filed for bankruptcy. The information here should not be considered legal advice and must not be relied upon in place of advice from a qualified bankruptcy attorney.
Bankruptcy does not actually eliminate the debt – it simply prevents the creditors from making an effort to collect the debt. Creditors cannot contact the debtors by phone, mail, telegram, etc. They cannot initiate lawsuits to recover their collateral, garnish wages, or attach bank accounts. The debt still exists. In most cases the creditors realize they will likely never get paid and move the debt into the loss column in the books.
The actual filing of bankruptcy is relatively painless. For the debtor who has been fighting with creditors for months, the filing will be a great relief. The debtors will put together a complete list of debts and meet with an attorney. The attorney will draft the paperwork and present it to the court. The court will set up a meeting with the creditors where the creditors have a chance to verify the debts and object to the filing. Creditors who fail to attend the meeting or file paperwork with the court will have no recourse to recover any part of the money owed them. Some secured debts such as home loans or car payments can be confirmed by the debtors and creditors. It is possible to continue making the loan payments and keep the home, car, or other collateral. The creditors can oppose this and the court will make the decision. Usually the attorneys involved will make a deal in the hallway outside the courtroom.
The laws provide for allowing the debtors to keep certain basic properties such as homes and cars. There are specific rules that can be complex. This is what the attorney is for. If it were not for the complexity of certain rules, a person could file bankruptcy without an attorney.
There are two primary forms of personal bankruptcy; Chapter 7 and Chapter 13. There are other “Chapters” for businesses, partnerships, etc. Chapters 7 and 13 are the most common. Chapter 7 is the type where the debts are totaled and a payment amount is setup. The debtor makes weekly or monthly payments for a length of time. The money is paid to the bankruptcy court and is regularly distributed among the creditors. Payment is made by money order because the court will not accept checks. In most cases the creditors get the majority of their principle back but not all the interest or late fees. This type of bankruptcy will take years to pay off. Any late or missed payments can cause the court to cancel the bankruptcy protection and release the restraints on the creditors. It is important that the payments are made regularly and on time. In hardship situations it is possible to make an agreement with the court to suspend or reduce payments for a short period of time.
Chapter 13 bankruptcy is used when the total indebtedness exceeds the ability of the debtors to pay it off in a reasonable time. If a house or car payment is confirmed in the agreement with the creditors these payments are made to the bankruptcy court and the money is distributed to the creditors by the court. Except for the confirmed debts the remainders of the debts are effectively “wiped out.” Remember: the debts still exist but the creditors cannot take any action to get their money.
After filing for bankruptcy with the court, the debtors are not allowed to take on any additional debt without prior approval from the court. If a person wants to get a student loan he can request permission from the court. The court can grant the debtor permission for the new loan.
If the bankruptcy does not involve a confirmed debt like a house or car payment, the entire process will take only a few weeks. If there is a secured debt that will be paid off the bankruptcy can take years to be discharged. Discharged means the court has finalized the paperwork and the debtors’ lives can return to normal. It will be a surprise for the debtor to learn that when the bankruptcy is discharged the mailbox will fill up with offers of credit.
Some of these offers are scams involving huge fees and interest rates – claiming to be able to restore good credit. Good credit is restored over time as the person makes payments on time and controls the amount of credit he carries. Chances are the person’s credit rating is already dismal if he is having problems making payments. The bankruptcy will have an impact on credit rating but perhaps not as much as one might think.
The changes in bankruptcy laws generally require the debtors to attend credit management and budgeting classes before the bankruptcy is discharged. These classes are often available online or by phone and both spouses must attend the classes and get a certificate. If a person has been struggling for a few months with a debt overload, the relief that follows immediately after the filing is unbelievable. The fear of having no credit cards is mostly unfounded. Life is possible and even simpler without credit cards and the temptation to overspend is gone completely. Pre-paid cards help with those situations where credit cards are required such as hotels and car rentals.
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