Personal Bankruptcy

Personal bankruptcy is designed to be a last-ditch financial solution which actually places a legal barrier between a debtor and his or her creditors. The United States Constitution guarantees its citizens the right to debt relief through bankruptcy, which can provide a new beginning and, with prudent budgeting and financial practices, a second chance at success. Far from a no-cost solution, bankruptcy can subject the debtor to the requirement of parting with at least some assets before the process is complete. However, it will not force the sale of everything that is owned. Previously, one of the first things that generally came to mind when discussing bankruptcy was the discharge of all debts. However, the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has introduced serious bankruptcy reform with much more emphasis on repayment structuring rather than debt cancellation. Many people in financial trouble will no longer qualify for Chapter 7 bankruptcy, being forced to file for Chapter 13 instead, which requires the institution of a three- to five-year debt-repayment plan.

Another important consideration which must be taken into account is that bankruptcy can leave a blot on the debtor’s record which can be a hindrance for many years. Although the bankruptcy itself can only legally stay on a credit file for ten years, many applications for employment and credit include the familiar question “Have you ever filed for bankruptcy?” And since answering falsely is a federal offense, it is possible for the lingering effects of a bankruptcy filing to last a lot longer than the ten-year statute. Potential creditors and employers have every right to allow the information contained in those applications to influence their decisions.

Individuals or families typically file for bankruptcy due to large medical expenses, job loss, divorce, or credit misuse or abuse. Although unpleasant, bankruptcy is considered by many to be an acceptable action to take for persons who are unable to fulfill their financial commitments. As mention earlier, there are two types of personal bankruptcy available, Chapter 7 and Chapter 13.

Under Chapter 7 bankruptcy, a petition must be filed with the bankruptcy court listing all of the debtor’s assets and debts. Assets not specifically protected under the laws of the residence state may be ordered to be sold. Laws generally permit the home, clothing, tools of one’s trade, and a means of transportation to be retained; however, there is a limit on the value that each of these can have. After the bankruptcy concludes there are no further obligations to creditors except for certain debts which cannot be settled in bankruptcy court; such as tax obligations, alimony, child support, and student loans. A Chapter 7 can be filed every eight years from a prior Chapter 7, or six years from a previous Chapter 13 filing.

Under Chapter 13 bankruptcy a court-appointed trustee uses the debtor’s future earnings to repay his or her creditors. The repayment must occur within a three- to five-year period of time. Under this filing the debtor is required to have legal representation. Assets are permitted to be kept by the debtor; therefore creditors generally settle for only partial repayment of the debts owed.

Although distasteful and usually quite stressful, bankruptcy can be used by well-meaning people to gain a fresh start. This system has, of course, been abused by some who borrow large sums without any intent of ever repaying; certainly the recent bankruptcy reform legislation is due in no small part to these circumstances. Bankruptcy can be useful, but only as a last resort; the effects can and will last long after the proceedings have concluded. Pursuit of this avenue should only be considered after all other options have proven unfruitful, such as debt counseling or other reduction strategies, or direct contact and negotiation with the creditors involved.

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