Bankruptcy Basics: What You Should Know

Bankruptcy as a means of debt settlement is a term that is often thrown around loosely, without real understanding of its specifics. It is often presented as an easy fix for the consumer who has gotten in over his or her head, but it’s not quite that simple. There are two basic types of personal bankruptcy, applicable to different types of situations. While these are governed by basic federal regulations through the federal court system, the states also have specific terms and conditions that do apply.

Chapter 7 Type Bankruptcy

In a Chapter 7 type of bankruptcy, it is possible to have your debts discharged without paying them or by paying just a fraction of their amounts. The federal court will decide what part of your debts you are going to be held responsible for, and may require you to sell some of your assets in order to pay your creditors the agreed upon sums. However, there are protections through the law that limit what you can be forced to sell, and allow you to hold onto some of your property. These protections are based on federal regulations, but are also subject to those on the state level as well. In general, you can keep a certain amount of equity in your home and vehicle, and you are also allowed a dollar amount of jewelry, personal possessions – such as clothing and household items, and trade or business related tools or equipment.

Once the court has made its decision, regardless of how much, if any, of the debts are paid, the debts that have been discharged by the court are no longer your responsibility. However, not all debts can be settled in this fashion. Among those that are not eligible for discharge under bankruptcy procedures are child support, alimony, student loans subsidized by the government, tax debt, and those that have come into being via fraud or other crime.

Recent changes to bankruptcy law have made it more difficult to obtain the Chapter 7 type of bankruptcy. Many of those who were once eligible for Chapter 7 are instead required to participate in credit counseling and then, if bankruptcy is still desired, file for Chapter 13.

Chapter 13 Bankruptcy

A Chapter 13 bankruptcy has certain similarities to a debt restructuring program, in which the federal court sets the repayment period, generally between 36 to 60 months. In these types of proceedings, assets do not have to be sold off, but a solid repayment agreement, in which creditors are offered at least what they would have received had the assets been sold and dispersed between them. Unlike a debt restructuring program, once you’ve paid the agreed upon portion of the debts, the remaining debt is discharged. As with Chapter 7, those debts that are not eligible for discharge under bankruptcy proceedings are still your responsibility and should be paid.

Which Path To Take

Filing for bankruptcy doesn’t carry the same social or fiscal stigma that it once did, and your credit rating will probably be salvageable afterwards. However, it is not a step to be taken lightly, and should be the last resort, something kept in reserve for the ultimate types of emergency, such as overwhelming medical debts. It shouldn’t be wasted on consumer debt, if at all possible. The credit counseling that has become part of the law applying to many seeking to file bankruptcy is a good option, and can even result in the financial situation being resolved without resorting to filing for bankruptcy. However, if it is necessary to do so, make your choice carefully through an honest assessment of your financial situation and what it is likely to be in the near future and treat it like the chance to make a new start that it is.

Understanding the procedures involved in filing bankruptcy can help you to make the best choice for your financial future, and can even help you to avoid filing altogether, in some cases, if you take full advantage of credit counseling. Far from casual, filing bankruptcy is a serious financial decision and should be handled as such, with all due time spent in research and learning before proceeding.

With that said, it is also true that for the individual who has grown and matured fiscally, learning from prior mistakes and mishaps, bankruptcy can be the doorway to a positive and healthy fiscal future.