Bankruptcy is a tool that can help you find financial stability—but only as a last resort.
Understanding Bankruptcy
Congress created the Bankruptcy Code, a breakdown of ways a debtor can plan to get out of debt when their creditors are trying to collect. The option to file for personal bankruptcy is there to help a person pay off a large amount of debt when they would otherwise be unable to. Through either chapter 7, an immediate action plan, or chapter 13, a repayment plan, you can pay off most of your outstanding debts and waive the rest.
Chapter 7
Chapter 7 of the Bankruptcy Code is designed to pay back debt through the collection of your assets or, in other words, things you own that have value. Your Bankruptcy Estate is a list of all the assets you own and is created when you decide to file. When this happens, your property is organized into three distinct categories.
Personal Property is everything you own that is moveable. This includes anything from jewelry to cars. As long as it is touchable and able to be moved, it is personal property that can be sold to pay off your debts.
Real Property includes any land or property, such as your house that you own. Though in some instances you can lose your home through filing with chapter 7, for the most part, as long as you keep up to date on your mortgage, this is unlikely to happen.
Intangible Property is anything that is untouchable: bank accounts and life insurance policies, for example. Even tax earnings are considered when filing for chapter 7.
The majority of these properties are used to pay back the people you owe. Bankruptcy can prevent you from going into further debt, help you escape looming interest rates, and allow you to start fresh. By the way, after filing, everything deemed as necessary will not be touched. There are different bankruptcy exemptions such as the Homestead Exemption—or a bankruptcy claim allowing for homeowners to safeguard some of the equity they have put into their home. To put it another way, this exemption will protect you from needing to give up your house.
Filing for chapter 7 will remain on your credit report for a total of 10 years. If you are worried about losing any of your assets, and do not like the idea of having it remain on your report for 10 years, you could consider chapter 13, instead.
Chapter 13
Chapter 13, also known as a wage earner’s plan, was created to help borrowers make realistically planned payments to their debt based on their income. After a court-decided period of time is over, your remaining debt is waived. In total, the only losses you’ll experience are the 3-5 years it took to pay off the debt and the next 7 years it will take to be removed from your credit report.
Qualifying for Personal Bankruptcy:
The qualifications for filing are designed to ensure that you understand the consequences of bankruptcy and whether it’s the best option for you.
There are necessary steps to take before you are qualified to file. One of the most important steps is financial counseling or, more specifically, pre-bankruptcy credit counseling. Don’t panic, it’s not a pass or fail test. Pre-bankruptcy credit counseling provides a way to review your situation and see if there is an alternative to filing for personal bankruptcy. For example, if Nia has debts, feels overwhelmed, and goes to counseling only to find out her situation isn’t as bad as she’d thought, then she walks out with a simple payment plan. This would mean that counseling saved Nia from the unnecessary headaches of filing and, even better, saved any further damage on her credit report.
Once financial counseling is finished, you’ll receive a certification which will be submitted with the bankruptcy paperwork no more than 15 days after filing. This certification will prove that you’ve not only done counseling within 180 days of filing, but also that you’ve gone through an approved agency.
Though a fee for filing is mandatory, you can pay it back in installments or separate payments. You can learn more about this process and its fees when you visit consumer.ftc.gov.
Means Testing
A Bankruptcy Means Test is used for generally the same reason in both chapter 7 and chapter 13 cases: to establish how much or how little someone has to pay back.
Chapter 7 means testing measures your income, family size, and overall expenses to figure out whether you qualify to file under the chapter 7 of the bankruptcy code. The means test is generally only required in a chapter 7 case if your monthly income is above the state’s median income (the designated amount of money that each state has selected). If you don’t qualify, then you will be asked to file for chapter 13. To learn more, visit uscourts.gov.
When filing for Chapter 13, means testing is used to determine the term length of your debt repayment. Why is this important? The way chapter 13 works is that you make payments that are designed around the amount of your disposable income—the monthly income you keep after eliminating all your necessary expenses from your paycheck. Means Testing in this case establishes whether your gross monthly income (monthly income prior to taxes) is under or over the applicable state median or the designated amount of money that each state has selected. If your income is below this median, you’ll most likely have a repayment plan of three years. If it’s above, you’ll have a repayment plan of five years. After the allotted time is finished, all other debt is waived.
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