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Should You File For or Declare Bankruptcy?

Filing for Bankruptcy is a Last Ditch Effort to Reduce Your Debt Burdens

The two most common forms of personal bankruptcy are Chapter 7 bankruptcy and Chapter 13 bankruptcy.

Chapter 7 Bankruptcy lets you eliminate most of your debts in exchange for giving up unprotected property.  This method is best if you have very few secured assets.  It can be accomplished rather quickly (months, not years), and you can eliminate more of your debts than Chapter 13 bankruptcy.  To file Chapter 7 bankruptcy, you fill out several bankruptcy forms and submit them to the bankruptcy court.  You must list your income and expenses, assets, debts and property transactions for the past two years.  See below for a list of non-dischargeable debts.  The cost to file is $200, but it can be waived if you receive public assistance or live below the poverty level.  Then, a court-appointed person, the trustee, is assigned to oversee your case. About a month after filing, you must attend a "meeting of creditors" where the trustee reviews your forms and asks any questions.  These meetings typically last five minutes and creditors rarely attend these meetings, so don't get too nervous. Also, if you have any nonexempt property, you must give it (or its value in cash) to the trustee at this meeting. Within 3 to 6 months you'll receive a notice from the bankruptcy court that "all debts that qualified for discharge were discharged." At that time your case is over and your credit will reflect the bankruptcy judgment for the next 10 years (from the date of filing).

Chapter 13 Bankruptcy is more complicated than Chapter 7 and takes 3 to 5 years.  Chapter 7 is most appropriate for those who have lots of assets and want to keep them.  While in Chapter 7 you must give up your assets, in Chapter 13 you are allowed to keep them by working out a plan to make up for late payments and to keep making agreed upon payments. To file, you have to file a proposed repayment plan, that covers the next 3 to 5 years.  The cost to file is $185 and cannot be waived.  There will be a "meeting of creditors", but creditors are likely to show up for this meeting.  After this meeting, you meet with a judge and he/she will either confirm or reject your plan.  If your plan is confirmed, and you make the scheduled payments according to the plan, you often receive a discharge of any balance owed at the end of your case.  After that, your credit will continue to reflect the bankruptcy filing for the next 7 years (from the time your final payment is made).

Non-Dischargeable Debts:  These are debts that are not dischargeable through bankruptcy, and will remain when your case is over.

  • fines and penalties imposed for violating the law, such as traffic tickets and criminal restitution
  • debts you forget to list in your bankruptcy papers, unless the creditor learns of your bankruptcy case
  • student loans, unless it would be an undue hardship for you to repay
  • child support and alimony debts for personal injury or death caused by your intoxicated driving
  • recent income tax debts and all other tax debts.

In addition, the following debts may be declared non-dischargeable by a bankruptcy judge in Chapter 7 if the creditor challenges your request to discharge them. These debts may be discharged in Chapter 13:

  • credit purchases of $1,150 or more for luxury goods or services made within 60 days of filing
  • debts you incurred on the basis of fraud, such as lying on a credit application
  • debts from embezzlement, larceny or breach of trust
  • debts from willful or malicious injury to another person or another person's property
  • loans or cash advances of $1,150 or more taken within 60 days of filing
  • debts you owe under a divorce decree or settlement unless after bankruptcy you would still not be able to afford to pay them or the benefit you'd receive by the discharge outweighs any detriment to your ex-spouse.

See Also:  Debt Advice