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If you've picked up this book, you probably have more debt than you can handle. Most likely, your debt mushroomed because of circumstances beyond your control -- job loss, divorce, business failure, illness, or accident. You may feel overwhelmed by your financial situation, and uncertain about what to do next. Maybe a friend, relative, or even a lawyer suggested bankruptcy, describing it as the best thing in the world for you. Someone else may have said the opposite -- that bankruptcy is a huge mistake and will ruin your life.
This book will help you sort through your options and choose the best strategy for dealing with your debts. It explains:
Armed with this information, you'll be ready to decide whether filing for Chapter 7 or Chapter 13 bankruptcy makes sense for you.
As you consider the strategies available to you, keep in mind that you're not alone. During each of the first five years of the new millennium, more than 1.5 million Americans filed for bankruptcy. So did thousands of companies. Although filings dropped dramatically just after the new law took effect, bankruptcy remains a necessary and pervasive part of our economic system.
And bankruptcy may be right for you. You may be able to stop creditor collection actions(such as foreclosures, wage garnishments, and bank account levies) and:
If your debts are overwhelming and your creditors are hounding you, bankruptcy may seem like a magic wand. But bankruptcy also has its drawbacks. And, because everyone's situation is a little bit different, there is no one-size-fits-all formula that will tell you whether you absolutely should or should not file. For many, the need for and advantage of bankruptcy will be obvious. Others will be able to reach a decision only after closely examining their property, debts, income, and recent financial transactions -- and how persistent their creditors are. For some, simple non-bankruptcy options might do the trick -- these are explained in Ch. 11 of this book.
This chapter provides some basic background information about the two types of bankruptcies most often filed by individuals: Chapter 7 and Chapter 13. In the chapters that follow, you'll find more detailed information on the issues you are likely to face under the new bankruptcy
Bankruptcy laws have changed.
As you know from this book's title, Congress recently made big changes to the bankruptcy laws -- and these changes will affect the filing options and decisions of many readers. One major new requirement has to do with eligibility: Filers with higher incomes (as measured against the
median family income for their state) may not be allowed to file for Chapter 7 at all, and will have to pay back more of their debts, over a longer period of time, if they file for Chapter 13. (You can find more on these requirements in Ch. 2.) And this is just one of the many changes. The new law leaves few areas of bankruptcy untouched, so you shouldn't assume that anything you thought you knew about bankruptcy before October 2005 is still correct: You may be unpleasantly surprised. The most important changes are described at the end of this chapter; each subsequent chapter concludes with a brief summary of the new rules covered in that chapter.
[Icons Used in This Book Sidebar] omitted for online sample chapter.Types of Bankruptcy
There are two kinds of bankruptcy: "liquidation" and "reorganization." In a liquidation bankruptcy (referred to as a Chapter 7 bankruptcy because of its location in the Bankruptcy Code), some of your property might be sold (liquidated) to pay down your debt; in exchange, most or all of your debts will be wiped out. Individuals can file for Chapter 7 (a "consumer" Chapter 7 bankruptcy) as can businesses (a "business" Chapter 7 bankruptcy). A Chapter 7 bankruptcy typically lasts three to six months.
In a reorganization bankruptcy, you devote part of your income to paying down your debt over time. There are three different kinds of reorganization bankruptcies:
This book focuses exclusively on consumer Chapter 7 bankruptcies and Chapter 13 bankruptcies. However, Chapter 11 and Chapter 12 bankruptcies are briefly described in Ch. 11.Chapter 7 Bankruptcy
This section answers some common questions about Chapter 7 bankruptcy.
To begin a Chapter 7 bankruptcy case, you must first complete a two-hour credit counseling session that typically costs about $50. When you file for bankruptcy, you must either include a certificate provided by the counseling agency that shows you've completed the counseling or certify that you've done the counseling and will file the certificate of completion within 15
days. There are a few exceptions to this requirement, discussed in Ch. 2.
Once you've completed your counseling, you can actually file for bankruptcy by completing a packet of forms and filing them with the bankruptcy court in your area. Perhaps the most important form -- made necessary by the new bankruptcy law -- requires you to compute your average income during the six months prior to your bankruptcy filing date and compare that to
the median income for your state. If your income is above the median, the same form takes you through a series of questions (called the "means test") designed to determine whether you could file a Chapter 13 bankruptcy and pay some of your unsecured debts over time. The outcome of this test will determine whether you will be allowed to file for Chapter 7 bankruptcy. (See Ch. 2 for detailed information about these calculations and other Chapter 7
In addition to completing the means test form and the petition, you must also complete forms that provide information about your property, debts, current income and expenses, and prefiling economic transactions. If you are making payments on a car or other personal property, you will
have to file another form stating how you wish to handle those debts after bankruptcy. As explained in detail in Ch. 6, you will have the choice of:
The laws of some states may give you an additional option of getting rid of the debt while keeping the property, as long as you stay current on your payments.If You File Your Own Papers
If you are filing your own bankruptcy case, the clerk will also require you to sign a form
You can find information in Ch. 9 on all the forms you need to file in a Chapter 7 bankruptcy.Which Debts Are Discharged
In a Chapter 7 bankruptcy, you get to cancel, or "discharge," many types of debts.
As a general rule, most credit card, medical, and legal debts are discharged, as are most court judgments and loans. Many filers can discharge all of their debts.
However, some debts are not discharged in Chapter 7 bankruptcy. The most common of these are:
Some types of debt will not be discharged if -- and only if -- the creditor gets a court order that the debt will survive bankruptcy. These are: debts arising from your fraudulent actions, recent credit card charges for luxuries, and willful and malicious acts causing personal injury or property damages. (For more on which debts are and are not discharged in a
Chapter 7 bankruptcy, see Ch. 3.)
The sum total of your property that is subject to the bankruptcy court's control is called your bankruptcy estate. In a Chapter 7 bankruptcy, a trustee exercises legal control over your bankruptcy estate (see "The Bankruptcy Trustee," below). Your bankruptcy estate consists of all the property you own on the date you file, property you recently transferred to others for less than it's worth, and a few types of property you reasonably expect to own
in the near future. (See Ch. 4 for more information about what is and is not in your bankruptcy estate.)
In return for having your debts discharged, the trustee may sell any property in your bankruptcy estate that isn't exempt under applicable state or federal bankruptcy laws, then distribute the proceeds to your creditors. In some cases, an item is exempt regardless of its value (for example, a state's exemption laws might allow you to keep a burial plot, a piano,
and/or your clothing). Sometimes, there are limits on an exempt item's value. For example, debtors who use the Georgia exemptions may keep jewelry only up to a $500 limit. If your wedding ring is worth $1,000, the bankruptcy trustee can take the ring, sell it, give you your $500 exemption, and pay the rest to your unsecured creditors.
In your bankruptcy papers, you must tell the court which property you claim is exempt under the exemption laws available to you. Under the new bankruptcy law, you must use the exemptions for the state where you have been living for the two-year period prior to filing. If you haven't lived in your state for two years, you must use the exemption laws for the state where
you were living before that two-year period began. (Some states allow you to choose between their exemption laws and a special set of federal exemptions -- you can use whichever rules allow you to keep more of the property you really want.)
Exemptions are a bit complicated -- and they are very important, because they determine what you get to keep (and what you may lose) when you file for Chapter 7 bankruptcy. Ch. 4 explains exemptions in detail, including how to figure out which state's exemptions are available to you
and how to apply those exemptions to the property you own.