Bankruptcy Explained

Many people struggle with debt and eventually they consider filing bankruptcy.  Bankruptcy is a legal process that allows a person to fix their problems with debt.  The main goal in bankruptcy is to prevent the loss of assets to creditors.

Two Ways to File

There are numerous ways to file bankruptcy, but the most common for consumers are Chapter 7 and Chapter 11.  Here is a short overview of the key characteristics of each Chapter:

Chapter 7
- Debt's are completely wiped out.
- All assets not exempt are sold off and the profits repay the creditors.

Chapter 11
- A plan is made to repay debts.
- Most assets can be protected and retained by the debtor.

Making the Choice

Choosing between which chapter to file is mainly a matter of assets.  If a person has little or no assets then a Chapter 7 is likely to be the best choice.  However, if a person has assets they wish to protect, and can afford a repayment plan, than a Chapter 11 may be the best choice.

New Laws

Under the new laws debtors are required to attend mandatory counseling.  They must attend one class prior to filing and another class before the bankruptcy is discharged. 

Additionally, there is now a means test.  A person can only file a Chapter 7 if they truly can not afford to pay back debt.

The Process in Short

Here is a quick look at the process for filing both a Chapter 7 and a Chapter 11. 

Chapter 7
- Debtor takes required credit counseling class.
- Debtor files with court.
- Non-exempt assets are turned over for liquidation.
- Debts are paid with money from asset liquidation.
- Debts remaining are cleared.
- Discharge.

Chapter 11
- Credit counseling class is completed.
- Debtor files with court.
- Repayment plan is constructed.
- Repayment plan is accepted by court.
- Repayment begins.

A Chapter 7 is a brand new start, where a Chapter 11 is more about protection from creditors.  Both will help a person to clear up their debt problems. 

It is wise for a person to choose which chapter they file after understanding them both.  The key is understanding your assets and the exemptions you can take, so you can be assured you will not lose something valuable.  Bankruptcy is a legal proceeding and is a very big responsibility.  It will show up on the person's credit report and could prevent a person form obtaining credit in the future.

For more information, please visit this website for Bad Debt Consolidation and how you can avoid bankruptcy