If you are experiencing financial problems, bankruptcy may be your solution. Bankruptcy can give you a fresh start from your debts. You should consult with an attorney to get some opinions on what will happen if you file bankruptcy. Most attorneys give a free consultation.
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Chapter 7
Chapter 7 bankruptcy is a liquidation that generally discharges or forgives your debt in as little as 90 days. A bankruptcy trustee is appointed to liquidate your assets. Most chapter 7 debtors have nothing to liquidate.
The trustee can only sell what you can sell. If you have a car with a lien securing your car loan, the trustee will want to sell it if there is something left over after the lien is paid. Most states also give you an exemption that lets you keep at least a couple thousand dollars of equity in your car. The trustee first pays the lien, then pays you the exemption amount, and uses what is left over to pay your other debts.
Since most cases have no assets to liquidate, the trustee does not usually sell anything. The amount of assets you can keep, before the trustee will sell something, varies from state to state. You should consult an attorney in your state to determine what assets you can exempt and thus protect.
You also must qualify for chapter 7.
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Qualifying For Chapter 7
A debtor qualifies for chapter 7 based on the amount made each month. This is commonly referred to as the "Means Test". The Means Test is more fully explained on the 8 page form B22 approved by the Bankruptcy Court.
If the GROSS amount earned each month is less than the median income for your state, then you automatically pass the means test and qualify for Chapter 7. The GROSS income is the average of your earnings for the 6 months prior to when you file your bankruptcy. Social Security is excluded from your income for the Means Test. The first two pages of the Means Test provide the various forms of earnings.
If your GROSS income is more than the state median income, then there is a complicated formula that is used to determine if your expenses exceed your income. The remaining 6 pages of the Means Test lay out various categories of expenses.
This qualification process is one of the most complex components of the Chapter 7 process and may require an attorney's help.
3
Chapter 13
If you do not qualify for Chapter 7 or want more bankruptcy protection than 90 days, you may consider filing Chapter 13. You must propose a plan that is approved by the Bankruptcy Court. If your plan is approved, you can get up to five years of bankruptcy protection.
For example, lets assume your mortgage requires you to pay $2,000 a month and you are 6 months ($12,000) behind on your mortgage. Chapter 13 gives you up to five years to catch up on your mortgage. Your bankruptcy plan must provide for the regular mortgage payment and an extra $200 a month for the mortgage arrears ($200 x 60 months = $12,000) plus fees. If the fees were $275 a month, by paying $2,475 for five years you would be current on your mortgage at the end of the bankruptcy.
Chapter 13 is much more complex and almost always requires an attorney's help. There are many little things that can cause your plan to be rejected. However, it can stop a bank from foreclosing for up to five years.
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Qualifing for Chapter 13
Chapter 13 is for people with (1) regular income, (2) total debt secured around 1 million or less, and (3) total unsecured debt of around $335,000 or less.
You must pay certain debts during your Chapter 13 case. However, you do not have to pay all of your debt . You only have to pay your credit card debt and other general unsecured debt, if you can afford to do so. But you must pay for the secured debt on the property you plan to keep. With the secured debt, you are allowed to reorganize the debt as long as your plan complies with all of the Chapter 13 Bankruptcy laws.
For example, you can reorganize the debt owed to your first mortgage so that you catch up on the mortgage over a five year period. You can get rid of part or all of a second mortgage in some cases. You can also take more time to pay your car debt which usually lowers your monthly car payment.
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Making Sure You Get A Fresh Start
As you can see from the above discussion, bankruptcy is a complex process. For many people, it is an important option for solving serious financial problems.
If you are more than a couple of months behind on your mortgage, you should be talking to your mortgage company. Many mortgage companies will work with you to modify your loan. However, the banks are disfunctional. They will often use the foreclosure process as a back up plan if the loan modification does not work.
Part of your fresh start is to get as much time as possible to save your house. Bankruptcy will almost always give you a couple more months before a bank can foreclose. Bankruptcy is your back up plan if the bank does not modify your loan. If the bankruptcy saves you two mortgage payments, it often pays for itself. If you get a loan modification, you may need bankruptcy to get rid of some debt so you can keep current on your mortgage.
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