Bankruptcy: An Introduction

The term bankruptcy refers to the legal status of a person (or organization) who is unable to repay the money they owe to their creditors. Navigating the world of bankruptcy law can be complicated and often confusing. Just the decision of whether or not to file can be an agonizing one. Because of its drastic and long-lasting effects, bankruptcy is usually considered a last-resort tool for managing debt. If you’re considering filing for bankruptcy, educating yourself about your options is the best place to start.

Which type?

There are several different types of bankruptcy in United States law, but only two that apply to the average individual. These are Chapter 7 and Chapter 13 bankruptcy. As a debtor, with Chapter 7 your non-exempt assets are sold and used to pay back your creditors. This is a relatively quick solution, normally lasting less than six months. Chapter 13 is a longer-term solution, allowing you to pay back your creditors over normally over a period of five years, and often interest is not charged on the amount being repaid.

What can I do to reduce the legal fees from my bankruptcy?

One of the most basic things you can do to help cut down on the legal fees you will need to pay for your bankruptcy case is to do as much preparation as you can on your own. Before you meet with a legal professional for the first time, you should make sure you’ve done some research and understand the basics of bankruptcy. You should also take a look at your own case and have an idea of where you would like to go with it. Important topics to research include: Who is eligible for which type of bankruptcy? What are the different types of bankruptcy? What are the advantages of filing for bankruptcy? What consequences arise from filing?

Before meeting with a lawyer, you should also make sure that you have done as much of the paperwork involved with your case as possible. All information regarding your income, costs and expenses will be essential for your case, as well as tax returns, credit card statements and other proof of your financial situation.

Disadvantages of bankruptcy

-       All credit cards that you were unable to pay off before filing for bankruptcy will be lost.

-       It may be necessary to give up some of your non-essential (luxury) possessions.

-       Getting a mortgage or buying a home or car after filing for bankruptcy is extremely difficult.

-       Employers don’t tend to look kindly on a record of bankruptcy. This may make it difficult to find a job.

-       Remember that bankruptcy stays on your credit report for ten years, so it will be difficult to develop credit or improve your credit score for at least that long.

-       Life insurance is difficult to obtain for people with a record of bankruptcy.

Advantages of bankruptcy

-       Filing for bankruptcy stops all collection actions by creditors, including foreclosures, repossessions, and garnishments.

-       Oftentimes you can exempt essential items like your house, your car and other necessities, from your claim.

-       If you are faced with student loan debt, bankruptcy can prevent lenders from forceful collection action.

-       Becoming ineligible for credit cards can actually work in your favor, helping you better manage your income and expenses.

  • Written by: Michelle Spatz
  • Saturday, 03 December 2011