Bankruptcy

Family Caregiving, Personal Finance April 05, 2009|Print
stack of bills

Contents

What is Bankruptcy?

Bankruptcy is a proceeding in a federal court in which a debtor who owes more than his or her assets can receive debt relief by transferring his or her assets to a trustee or agreeing to reorganization of assets and liabilities. Usually, at least two years must elapse from the discharge of the bankruptcy before lenders will consider making a loan to someone who has declared bankruptcy.

When is Bankruptcy an Answer?

Bankruptcy may be an answer when overwhelming medical bills or other unexpected financial crises occur and people find that they have more bills than income to repay them. There are serious consequences of bankruptcy, so it should be a last resort for most people.

Costs of Bankruptcy

There are costs involved in filing the legal documents, and the process usually requires the services of an attorney. Bankruptcy will show up on your credit report for a period of seven to 10 years. Long after that time period, credit applications may ask if you have ever filed for bankruptcy. Employers may not hire you if they find bankruptcy on your credit history. Employers may not fire current employees for filing bankruptcy, but potential employers may legally reject you.

Landlords may choose to not rent you a place to live. In addition to all of these consequences, you may be charged higher interest rates on new loans if you have gone through bankruptcy.

Types of Bankruptcy

There are two types of personal bankruptcy filings, Chapter 7 bankruptcy and Chapter 13 bankruptcy. Both types are governed by federal and state laws, so it is important to hire an attorney to guide you through the process.

In Chapter 7 bankruptcy, most of your debts are discharged. All nonexempt property is sold and the proceeds are used to pay a portion of what you owe your creditors. Exempt property may include your home and your car if they are paid for, but there are many conditions that determine which property legally qualifies as exempt property. Some debts fall into the category of nondischargeable and must be paid. Some of these nondischargeable debts include child support and alimony, most student loans, income taxes from the past three years, and other financial obligations.

In Chapter 13 bankruptcy, you plan to repay your creditors and work out a plan to make monthly payments to the bankruptcy trustee, who will then pay your creditors. The average length of time to fulfill a Chapter 13 bankruptcy is three years. Many people with debt problems work with a consumer credit counseling service such as those affiliated with the National Foundation for Credit Counseling. A legitimate credit counseling service may help you make decisions about how to resolve your debt problems.