Bankruptcy is the process necessary to obtain a "financial fresh start" legally. The right to file bankruptcy is based on federal laws and the cases are handled in a federal court. But the laws can be complex and the process involves a multitude of forms. There are different types of bankruptcy known as "chapters". Which chapter a debtor decides to use depends on what they want to achieve.
Chapter 7
The most common chapter in bankruptcy for individuals is known as Chapter 7 or Liquidation. The end result in a Chapter 7 is usually a total discharge or cancellation of your debt. However, there are some debts that cannot be discharged (most taxes, domestic support such as alimony, child support, most student loans, personal injury judgments, etc.).
Chapter 13
Known as the "reorganization" chapter. This allows individuals to reorganize their financial situation. In most cases, this involves a reduced repayment plan over 4-5 years. In some instances, mortgages can be adjusted to allow the debtor to resume making payments and catch up on arrearages or possibly reduce the mortgage amount altogether.
WHAT BANKRUPTCY CAN AND CANNOT DO
Bankruptcy may make it possible for financially distressed individuals to:
1. Discharge liability for most or all of their debts and get a fresh start. When the debt is discharged, the debtor has no further legal obligation to pay the debt. You may repay the debt if you desire, but you are no longer obligated to do so. Please note that if the debt is secured by some form of collateral (house, car, etc.) you should continue those payments or you may be required to surrender (return) the property to the lender. It is our goal that this does not happen unless you agree and determine that it is in your best interest.
2. Stop foreclosure actions on their home and allow them an opportunity to catch up on missed payments.
3. Prevent repossession of a car or other property, or force the creditor to return property even after it has been repossessed.
4. Stop wage garnishment and other debt collection harassment, and give the individual some breathing room.
5. Restore or prevent termination of utility service.
6. Lower the monthly payments on debts, including secured debts such as car loans.
7. Allow debtors an opportunity to challenge the claims of certain creditors who have committed fraud or who are otherwise seeking to collect more than they are legally entitled to.
Bankruptcy, however, cannot cure every financial problem. It is usually not possible to:
A. Eliminate certain rights of secured creditors. Although a debtor can force secured creditors to take payments over time in the bankruptcy process, a debtor generally cannot keep the collateral unless the debtor continues to pay the debt.
B. Discharge types of debts singled out by the federal bankruptcy statutes for special treatment, such as child support, alimony, some student loans, certain court ordered payments, criminal fines, and some taxes.
C. Protect all cosigners on their debts. If relative or friend co-signed a loan which the debtor discharged in bankruptcy, the cosigner may still be obligated to repay the loan.
D. Discharge debts that are incurred after bankruptcy has been filed.
“So how do you know when it’s time to file bankruptcy?” Here are some of the most important warning signs:
When you have experienced any or all of these things, bankruptcy may be the best relief available to you.