More and more Americans are looking for relief from the financial crisis. Bankruptcy is a legal process guided by federal law. Bankruptcy enables either an individual or a business to obtain a fresh financial start when they are in such difficulty that they cannot repay their debts.
Bankruptcy is governed by Title 11 of the United States Code. There are different types of bankruptcy proceedings; however, Chapter 7 and Chapter 13 are most often used by individuals.
The bankruptcy code allows each person who files bankruptcy to keep basic assets considered necessary for a “fresh start” after bankruptcy. The assets that the debtor (individual owing money) is allowed to keep are classified as exempt assets. For example, your home is typically fully exempt from creditors. However, in Chapter 7 bankruptcy proceedings, if the debtors have any nonexempt assets, these assets are liquidated and the creditors receive some payment from the proceeds.
In Chapter 7 cases the individual receives a discharge for certain debts. Credit card debts are generally eliminated. In a Chapter 13 bankruptcy proceeding the debtor keeps the property but is required to pay some changes towards debts owed. Upon completion of a Chapter 13 payment plan, the individual’s remaining debts are eliminated.
Some debts cannot be eliminated, alimony, child support, student loans, fraudulent debts and some income taxes
The federal government made major reform of the bankruptcy system with the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) as it is called. The basisfor BAPCPA is that individuals who could pay their debts were abusing the bankruptcy process by wiping out all of their debts with Chapter 7 filings. The new bankruptcy law created a formula to determine whether an individual can pay back their creditors.
The formula looks at the individual’s income in relation to the median income of the state. If you are below the median income in certain states, then you can file Chapter 7. If you are above the median, you may also be eligible for Chapter 7 based only on acceptable reductions to your gross income. If the formula however indicates that you have any excess income, then you may not be eligible for Chapter 7 and may be required to file Chapter 13. Although Chapter 7, generally, is a greater relief to individuals, there are some circumstances where Chapter 13 may be more beneficial. For instance, if facing foreclosure, Chapter 13 can assist in keeping your home by providing a payment plan for your mortgage, provided mortgage is the issue. It might be in your best interest to contact an attorney will help you determine whether bankruptcy is necessary and will guide you through the “B Word”, Bankruptcy.