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Basics of Bankruptcy

Bankruptcy is an ethical, legal way for individuals and married couples to address large debts that are overwhelming their ability to pay them. Bankruptcy procedure is controlled by US Federal Bankruptcy laws and administered by the US Bankruptcy Court system where bankruptcy judges have wide discretionary powers. Bankruptcy can be as short as 4 months or as long as 5 years.

Slowly over the past two decades the number of people who filed for bankruptcy has climbed. In 1980, for example, only 300,000 people filed for bankruptcy. It doubled in 1990 to 600,000. Since 2006, over 2 Million consumers in the United States have filed for Bankruptcy.

Here are a few characteristics of an average consumer who declares bankruptcy:

  • The average age is between 35-38
  • 44-46% of filers are couples
  • 30-34% are women filing alone
  • 26-28% are men filing alone
  • Bankruptcy filers have a higher education level than the general public
  • Most of them don’t have a job or have lost their jobs recently
  • Half have experienced a serious illness or continue to be seriously ill

 

Debt Relief Options: Filing Bankruptcy May Help

When most individuals declare bankruptcy, it’s often their last option to address their debt situation. While bankruptcy does not always eliminate debt totally, it is often an individual’s most effective option. Certain debts still need have to be paid. Good legal advice is the key to getting most of one’s debt included in the bankruptcy. It’s important to know what kinds of debts can be discharged through bankruptcy. Let’s take a look:

 

Types of Bankruptcy

There are 3 major type of bankruptcy protections available: Chapter 7 and Chapter 13 provide bankruptcy protection for individual consumers while Chapter 11 for organizations, businesses and consumers with very large debt.

Chapter 7 Bankruptcy:

This is the most common type of bankruptcy proceeding. In contrast to Chapter 13, this is a liquidation proceeding and not a reorganization. All property of the debtor except the exempt property will be liquidated to pay off the debts. Some examples of exempt assets would be:

  • A certain amount of equity in that person’s home.
  • A certain amount of equity in that person’s car.
  • A small amount of clothing.
  • A small amount for other personal items.

Chapter 13 Bankruptcy:

This is a re-organization based bankruptcy proceeding. This bankruptcy is meant for consumers who plan to pay off their debt in 3-5 years. This type of bankruptcy appeals to those who have non-exempt property that they want to keep. The amount of repayment can range from as little as 10% to 100% depending on the debtors income and the amount owed. However there are limitations on chapter 13 re-organization bankruptcy, the consumer can only have a maximum of $250,000 of unsecured debt and a maximum of $750,000 of secured debt.

Chapter 11 Bankruptcy:

This type of bankruptcy proceeding is for organizations, large companies and individuals with very large amounts of debt. Like Chapter 13, this does not have a limit on the debt amount. It is the usual choice for large businesses seeking to restructure their debt. The debtor remains in possession of the assets and operates the business as usual under court supervision for benefit of the creditors.

It is true that bankruptcy is not for the faint hearted, it can have serious financial consequences of not done right. Bankruptcy stays on the consumer credit for 7-10 years. It is critical to seek legal advise to file for bankruptcy as the laws have changed dramatically to make it very hard to self-file. A bankruptcy attorney can show you the right options and can ensure that you get the protection you deserve.

Bankruptcy Cautions:

There are aspects of a bankruptcy that one should understand before deciding on what’s best for their circumstances. Cautions include:

  1. Bankruptcy can be a very emotional experience and one has to be ready to deal with this.
  2. A bankruptcy can stay on one’s credit report for up to 7 years.
  3. Bankruptcy laws changed in 2005 and today it’s important to have good legal counsel to file to insure you get all the benefit that’s available.
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