Filing for Personal Bankruptcy: What You Should Know

For some people, bankruptcy is almost always associated with failed businesses and corporations. Yet statistics gathered by debt.org show that consumer or personal bankruptcy in the United States comprise 97 percent of all filings while business bankruptcy made up only 3 percent. States vary in their laws, including the law on wage garnishment, and this is a key factor in the number of bankruptcies filed. California leads the list with more than 240,000 filed and Alaska has the least, at less than 1,000.

The major causes of consumer bankruptcy used to be medical expenses but when the recession hit, more people filed for bankrupt status due to job loss or reduced income, poor financial management leading to credit card debt, divorce and unexpected expenses.  A gambling addiction that leads to personal financial crisis may be an unreported cause but it is true nonetheless.

Bankruptcy, even if it absolves you of debt, as in Chapter 7, should be your last resort. The only positive outcome of being declared bankrupt by a federal court is the discharge from debts or automatic stay that stops creditors from hounding you.

Before filing for bankruptcy, here are important facts you should know:

1. There are three types that you can choose from but the third, Chapter 11, is rarely used for personal bankruptcy.

Chapter 7 is the liquidation bankruptcy wherein all liquid and non-exempt assets are sold and the proceeds used to pay the creditors. Exempt and non-exempt properties vary depending on state exemption laws. Hence, you will need a good bankruptcy lawyer to help handle your application and retain control and ownership of most of your possessions. Any remaining debt will be discharged and federal law prohibits creditors from harassing and collecting from you. A Chapter 7 bankrupt status will stay in your credit report for ten years and will reduce your opportunities for employment, house rental and future loans. You cannot file a second Chapter 7 bankruptcy for the next eight years.

Prerequisites to filing for a Chapter 7 are attending a credit counseling session within 180 days before filing and, for filers who make more than their state’s median income, taking a Means Test. The means test prevents abuse of the bankruptcy system; if you fail, you will not be eligible for the Chapter 7 and your case may be converted to a Chapter 13.

Chapter 13 is for people who still have income to pay off their debts and those who want to keep their properties but are unable to meet excessive debt payments. It allows for a three to five repayment plan for all or some of your debts. You are eligible for a Chapter 13 if your secured debts are less than $1,081,400 and your unsecured debts are below $360,475. This type of bankruptcy will allow you to keep your house from foreclosure by paying the arrears in installment while at the same time paying your monthly mortgage dues.

Like the Chapter 7 plan, you have to get credit counseling through an accredited agency. Your Chapter 13 bankruptcy will stay in your credit record for seven years and you cannot file for another one for four years.

Debts that you have to pay, even if you have been approved for any bankruptcy filing, are:

• Mortgage payments
• Child support and alimony
• Student loans
• Debts as a result of DUI or DWI
• Traffic tickets
• Certain taxes

Debts from taxes are dischargeable only if they are income taxes, the debt is at least three years old, you filed a tax return and you did not intentionally evade paying taxes or commit fraud in filing your tax return. Some debts may not be dischargeable depending on how the creditor presents them. If you must file for bankruptcy, legal advice is always recommended to fully protect you.