A Guide to Bankruptcy

In these difficult financial times, many individuals and families who are trying to navigate out of debt may believe that bankruptcy is their only option. This guide can help you decide whether bankruptcy is right for you. While bankruptcy is a legal and useful course of action for some wanting a fresh start and a way out of debt, it is not for everyone. Bankruptcy brings with it a significant and serious impact on your personal finances and credit for years to come.

Certainly, it is wise to get whatever bankruptcy information you can to understand at least the fundamentals of the bankruptcy process before considering it as a debt relief option. On the other hand, because bankruptcy laws can be confusing many choose to use the services of a bankruptcy attorney or lawyer. Basically, there are three main types or chapters of bankruptcy. In short they are:

• Chapter 7 - utilizes liquidation of non-exempt property to pay debts and is often referred to as "straight bankruptcy."
• Chapter 13 - or "wage earner's plan" operates through a reorganization of debts.
• Chapter 11 - involves debt reorganization generally of a business such as a corporation or partnership.

Perhaps you've read or heard that bankruptcy is the best way to put an end to such problems as debt collection calls, foreclosure on your home, or lawsuits and wage garnishments. To some extent this is true. However, because bankruptcy negatively affects your personal finances and credit for many years, it is imperative that you know the pros and cons of all the debt relief solutions available to you in addition to bankruptcy.

To review alternative debt options to bankruptcy, you can get a free debt relief analysis and savings estimate at no obligation.

Bankruptcy Alternatives

Many people these days have found themselves in deep financial waters, often because of everyday life events or even circumstances beyond their control such as the loss of a job, disability, or medical bills. At this point, the saying "When life gives you lemons, make lemonade" might be fitting. Though being in debt can seem like life has given you lemons, bankruptcy is not necessarily the solution or the "lemonade." In fact, the after effects of bankruptcy can be very sour indeed.

If you feel like your debt is out of control, are considering bankruptcy and worried what to do next, be assured that the following legal debt relief alternatives could provide you with non-bankruptcy solutions. These debt help alternatives include:

• Debt Management - combines all unsecured credit cards and other debts into one lower, easier to manage monthly payment with a debt management plan or DMP.
• Credit Counseling - a process required prior to filing for bankruptcy to determine a debt relief plan and/or an instructional course in personal financial management.
• Debt Consolidation- combining or "consolidating" all high-interest credit cards and other debts into a single, more manageable monthly payment.
• Debt Settlement- or debt negotiation is a settlement offer to creditors of an accumulated lump sum that is significantly lower than the total debt amount.

Depending on your particular situation and the debt option you select, it is possible that you will be able to reduce interest rates, waive fees and penalties, consolidate debts, lower payments, or even settle your debts for substantially less than you currently owe.

To review your debt relief options, you can answer a few simple questions online to request a free debt relief analysis and savings estimate.

Bankruptcy and How It Works

What happens when individuals and businesses can't pay their bills - like credit cards, payroll, medical or mortgage? To prevent people from sinking ever deeper into an abyss of debt, the U.S. government offers the legal process known as bankruptcy. It is designed to assist those in serious debt to achieve a kind of financial "clean slate." The right to file for bankruptcy is a federal law, but each state is allowed to adopt its own exemption laws in place of federal exemptions.

What makes bankruptcy attractive on initial inspection? It can provide relief from debt collectors and possibly disturbing and constant debt collection agency practices. Until such time as your debts can be sorted out in accordance with the law, filing for bankruptcy in effect, stops creditors from debt collection activities.

Bankruptcy may also remove your financial obligation to pay the majority or even all of your debts. It may provide relief from foreclosure and allow you to get current with your payments. Nevertheless, you will still be responsible for any debts you incur after bankruptcy has taken place. As a debt relief option, bankruptcy may further prevent repossession of your car or other property, stop a wage garnishment, or even halt further collection activities.

Additionally, one less considered but potentially life affecting area that bankruptcy could help with is, in restoring or preventing the interruption or your utility services. Maintaining water and power are vital, especially in colder climates, and should factor into your debt relief decisions.

Secured Debt vs. Unsecured Debt

When a person is about to go bankrupt, questions often come up regarding what are the differences between "unsecured" and "secured" debts and which of these debts will be covered by filing for bankruptcy? Basically, secured debts are backed by a pledge of collateral and include such property as mortgages, auto loans and tax liens. Unsecured debts are based only on the creditor's estimation that a debtor has the ability to pay off a debt (e.g. credit cards, medical bills and retail store cards).

In most cases, bankruptcy does not get rid of certain collection rights of secured creditors who have accepted a mortgage or other lien on a property or asset as loan collateral. Most commonly, this would apply to a home loan or car loan.

However, bankruptcy law varies from state to state and so does what is considered "exempt property" (property protected from creditors). For example, in some states the debtor may be able to exempt all or a part of their equity in a primary residence (called a homestead exemption). Or, they may be able to keep some or all "tools of the trade" used to earn a living (e.g., dental tools for a dentist or auto tools for an auto mechanic).

Another common question regarding bankruptcy is whether or not child support obligations, alimony, divorce payments, and other debts such as student loans are discharged. These debts are considered "non-dischargeable" and usually are not covered by bankruptcy. In addition, if you have debts that include cosigners, those cosigners are still obligated to pay all or part of the loan in question.

To review alternative debt relief options to bankruptcy, you can get a free debt relief analysis and savings estimate at no obligation.

Types of Bankruptcy

There are three main types of bankruptcy: Chapter 7, Chapter 11, and Chapter 13.

Chapter 7 Bankruptcyis known as a straight bankruptcy or liquidation. This form of bankruptcy requires that the debtor relinquish property not covered by "exemptions." In most cases, your property will be sold to pay off creditors. Check your state bankruptcy laws to see what exemptions exist regarding your "homestead" or your personal home.

Other exemptions to investigate include, but are not be limited to, personal property such as home furnishings, one motor vehicle per household member, livestock, pets, family heirlooms, sporting goods, food, clothing, health care aids, insurance benefits and policies, equity in business partnerships, pension plans, retirement plans, tools, and wages that have been earned but not paid.

Since the provision in the federal Bankruptcy Code permits each state to adopt its own exemptions, it is important to see whether you will be better off using federal bankruptcy exemptions or those in the state in which they live.

Chapter 11 Bankruptcy ("reorganization bankruptcy") is different from Chapter 7 in many ways, most particularly the fact that all or the majority of your debts are typically not discharged, but instead are "reorganized." This process is designed to give you the much needed temporary relief to allow you to pay back your debts over a period of time using a manageable plan.

Businesses or individual debtors who have accumulated a large amount of debt typically utilize Chapter 11 as a debt relief option. The positives of a Chapter 11 bankruptcy are that it permits an individual to maintain control of their business and protect certain assets while a court-appointed trustee oversees/monitors business operations.

A Chapter 13 Bankruptcy is often called a "debt adjustment." It affords legal relief from debts and creditors in exchange for the debtor's obligation to file a formal plan to pay all or a portion of debts from their current income. Typically, individuals considering personal bankruptcy file Chapter 7 or Chapter 13, whereas a business (such as a corporation or partnership) will normally select Chapter 11 bankruptcy.

To review alternative debt relief options to bankruptcy, you can get a free debt relief analysis and savings estimate at no obligation.

Qualifying for Bankruptcy

The most recent major change in bankruptcy laws was written by the United States Congress and became effective October 17, 2005. The legislation requires those filing for bankruptcy to undergo a "means test." To file for Chapter 7 (straight bankruptcy), you must first pass what is referred to as the "means test" (which is specific to the state in which you live).

Under this provision, if a debtor's "current monthly income" is more than the state median, the "means test" is used to determine whether the chapter 7 filing is warranted. The median income varies from state to state.

For example, in the state of Texas, if you make less than the "median" or average income for a family in Texas, you may file under Chapter 7. For singles, the median income is $36,285. For a family of two, the median income is $51,355. For a family of three and four, the figures are $53,803 and $61,511 respectively. If there are more than four in a family, the number increases by $6,900 for each additional person. If you pass the "means" test, you will still be required to undergo credit counseling approved by the state of Texas prior to being able to file for bankruptcy.

Once you have passed the "means" income requirement and gone through credit counseling, (mandatory prior to filing under any chapter of the Bankruptcy Code) you will then work with your bankruptcy attorney or other legal representative to file a written statement of financial affairs with the court. This will include a list of all your debts, both secured and unsecured (such as sources of income, transfers of property, lawsuits by creditors, etc.) -- basically a list of all your personal property and assets.

If you do not pass the "means test" by virtue of making more than the average income for households of your size, you may qualify for Chapter 13 bankruptcy, which involves paying back at least a portion of your debts, a over a three to five years period (depending on your income).

To qualify for a Chapter 11 bankruptcy for businesses, the entity must be a corporation, partnership, or limited company. The business would be required to file a report of assets and liabilities. Usually, in a Chapter 11 bankruptcy a business will enter into a contractual relationship with creditors and lenders that allow the business to continue operations and get back on firm footing via more favorable terms. The revenues of the business, especially profits, can be used to repay debts and loans.

The bottom line, Chapter 11 Bankruptcy for businesses can be invaluable in helping a business to better manage its debt, reduce its debt and endure a rough period so that it can survive and continue operations.

Regardless of the bankruptcy option you choose, bankruptcy is a serious financial decision that will have a long lasting impact on your personal finances and credit. So, it is wise to consider all available debt relief options before deciding which debt relief solution best fits your particular situation.

To review alternative debt relief options to bankruptcy, you can get a free debt relief analysis and savings estimate at no obligation.