What is Bankruptcy?

Bankruptcy is a legal proceeding in which an individual who cannot pay her bills may be able to get financial relief. The right to file bankruptcy is provided by federal law, and all cases are handled in federal court. In 2005, however, bankruptcy laws went into effect that notably changed the process of bankruptcy. See Overview of New Bankruptcy Laws below.

Are there Different types of Bankruptcy?
Yes, there are four types of bankruptcy cases:

CHAPTER 7: Known as "straight" or “personal bankruptcy" it is the most common form of bankruptcy. It may result in the total elimination of most of your unsecured debts and the prevention of further collection efforts by debtors. Chapter 7 involves liquidation of all assets that are not exempt.

CHAPTER 11: Used mainly by businesses it is often called "reorganization."

CHAPTER 12: Reserved for family farmers.

CHAPTER 13: Is often called "debt adjustment or debt reorganization". It requires a debtor to file a plan to pay debts (or parts of debts) from current income.

Will bankruptcy wipe out all my Debts?
Maybe. Bankruptcy cannot cure every financial problem. In bankruptcy, you will still have to pay debts owed to secured creditors (See glossary below) if you want to keep the collateral (property). You will still have to pay debts owed to certain unsecured creditors (See glossary below) like debts you owe for child support; alimony; student loans; criminal fines; and taxes.

Reaffirmation: Voluntarily reaffirming a debt to a secured creditor is a promise to repay the debt rather than discharging the debt in bankruptcy. Reaffirmation is always optional. It is not required by bankruptcy law or any other law.

Overview of Bankruptcy Laws
The new laws went into effect in mid-October of 2005. Now that the new laws are in effect there are new things you must consider when thinking about filing for bankruptcy. Under the new laws all debtors must get credit counseling before filing for bankruptcy and even more counseling on budgeting and debt management before your debts can be wiped out.

What Do the New Laws Mean to Me?
Means Test: The new bankruptcy laws now demand a “means test” to see if you qualify to have some or all of your debts wiped away. The test determines if you can file for Chapter 7 bankruptcy (almost all unsecured debt is erased) or Chapter 13 bankruptcy (you pay back some or all of your debt under a repayment plan). It is also a test to safeguard against the abuse of bankruptcy relief under Chapter 7.

Under this test, if you have more than a certain amount of money left in a month after paying approved average monthly expenses then you will have to proceed with a Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. If you do not meet the requirements of the “means test” you may be able to show special circumstances to justify a higher expense allowance.

Financial Counseling and Education The new bankruptcy laws also require that someone thinking about filing bankruptcy to first get information about credit counseling and help in analyzing your budget. You will be required to complete courses in personal financial management before having your debts discharged in bankruptcy.

GLOSSARY:

Secured Creditor: This a creditor who has collateral for the loan or item you received on credit from them. This usually means you signed a contract giving them the right to take something if you do not pay. Common examples are car loans and home mortgages.

Unsecured Creditor: An individual or institution that lends money without obtaining specified assets as collateral. This poses a higher risk to the creditor because they have nothing to fall back on should the borrower default on the loan. A common example of this is a credit card company.

Article Source: http://freelegalinformation.info

Published by: Arkansas Legal Services