Is Bankruptcy the Right Option For Me?

Have you ever considered bankruptcy? Everyone that has debt fantasizes from time to time about what it would be like to get debt relief by walking away from what they owe. While considering bankruptcy may seem like an “easy out” to some people, it’s actually a complex legal process that should involve careful consideration. Before deciding if it’s the right choice for you, it’s important to understand what it involves.

Bankruptcy reform laws enacted in 2005 have made it more complicated for consumers to consider bankruptcy as a first choice for addressing their debt situation. Debtors must participate in court-approved credit counseling and debtor education prior to filing. The Federal Courts have exclusive jurisdiction over bankruptcy cases, which means that they are handled through federal or bankruptcy courts instead of at the state level. The laws are different for businesses and corporations than for individuals. For those looking for more information, here is a general overview of the different types of bankruptcy filings available for individuals.

There are 5 different types of bankruptcy filings.

The two most common types of bankruptcy filings for individuals or families are Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy (also known as “liquidation”) allows the debtor to “liquidate” or surrender their assets in order to discharge their debts. This type of filing can take between 4-6 months and is typically an option for those who have very little assets, low income and a large amount of debt. Debtors must pass a “means test” to prove that their median income is less than that established for their state. If this test is not passed, and the debtor has income to support partial or full repayment, they will be directed toward Chapter 13 filing.

Chapter 13 Bankruptcy is a form of filing where the debtor (an individual, not a business or corporation) enters into a repayment plan for all or part of their debt under court supervision. With this type of filing, foreclosure and collection attempts for the debts owed are halted and the debtor is able to repay according to the court order under a three to five year plan without being required to surrender their property and assets. With a chapter 13 filing, the debtor’s income is taken into consideration when structuring the repayment plan.

If you are considering bankruptcy, it’s important to fully understand your options as well as the process. A comprehensive overview of the bankruptcy process can be found at The United States Courts Bankruptcy site.