What Exactly Is Bankruptcy?
Bankruptcy. We know that we try to avoid the process at all costs, but do we understand what bankruptcy is? When we think of Chapter 7 or Chapter 13, you are more likely to think of the library than your finances. Let’s discuss exactly what bankruptcy means and what impact that may have on your personal circumstance.
What is Bankruptcy?
Bankruptcy is the term used to define the legal process in which through the protection of the federal bankruptcy court, both individuals, and businesses can cancel or reduce some or all of their outstanding debts.
Is There More Than One Type of Bankruptcy?
Yes, there are four different categories of bankruptcy:
Chapter 7
Chapter 11
Chapter 12
Chapter 13
Our discussions will mainly involve Chapter 7 and Chapter 13 bankruptcies, but we’ll take a quick look at each type.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy can be filed by a consumer or business. The process takes approximately three to six months to complete.
To be eligible for a Chapter 7 bankruptcy, you must meet the following criteria:
You must not have sufficient income to meet your debt obligations
You must not have had debts discharged in a Chapter 7 bankruptcy proceeding within the previous eight years, or a Chapter 13 bankruptcy proceeding during the past six years.
Your case was not dismissed within the last 180 days
You did not defraud your creditors
Chapter 11 Bankruptcy
This filing allows businesses and in some cases individuals to restructure their affairs and continue operations. This type of filing is typically avoided by smaller firms and individuals due to the significant time commitment and expenses involved with this kind of filing. For individuals, this option is usually reserved for instances where their debt exceeds the limitations to qualify for a Chapter 13 filing ($383,175 in unsecured debt, $1,149,525 in secured debt).
Chapter 12 Bankruptcy
The Chapter 12 bankruptcy filing mirrors its Chapter 13 counterpart with few exceptions. Chapter 12 bankruptcy is reserved for consumers and businesses where at least 80% of the debts are a result of fishery and farming operations. Debt limits are increased to accommodate these business types and in certain cases, a debtor has the enhanced power to eliminate certain lien types.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy, also known as a reorganization, requires you to pay back some or all of your debts, but typically allows you to do so over a three to five-year period. Chapter 13 bankruptcies are reserved for individual (as opposed to business) filers who have sufficient disposable income to cover the debt obligations.
What Kinds of Debts Cannot Be Included in my Bankruptcy Filing?
While there are many debts, such as credit card debts and medical bills that can be eliminated with bankruptcy, there are some debts that are not eligible.
Alimony and child support obligations
Student loans cannot be removed except certain extreme cases.
The only instance where student loans will not survive bankruptcy is in cases where they are determined to cause “undue hardship”. To prove this, you must be able to show that you don’t have the capacity to pay your student loans, and that is like to be the case for the foreseeable future.
Most tax debts
Debts you omitted from your filing
Fines and penalties imposed for law violations such as traffic tickets and criminal restitution
Obligations related to personal injury or death as a result of your driving under the influence
It is important to note that filing bankruptcy does not prevent repossession of the property even when the debt against the property can be eliminated.
Exception: Certain things can be done during the bankruptcy case to avoid liens. Please consult your legal advisor for more information.
What are Some Signs That You Might be at Risk for Filing Bankruptcy?
Many people will have financial difficulty from time to time. Here are some signs that your circumstance might be more severe.
Missed Payments/Debt Collectors
If you’ve gotten behind on repaying your debts and have gotten to the point where you have started to receive calls from collection agencies, this may be a sign of trouble. This usually occurs when your payments are 30 to 60 days in arrears. If you are unable to make the minimum payments on your debt obligations, you may be over your head financially.
Using High-Interest, High-Fee Loan Options
Payday loans may seem like a viable option to meet cash flow needs. However, due to the prohibitively high interest rates and fees, many consumers find themselves on an endless payday loan cycle leaving bankruptcy as seemingly the only remaining option.
Home Equity Credit Line Tapped Out
As a homeowner, the equity in your home may seem like the perfect resource to get yourself back on track. However, if the equity in our home wasn’t sufficient or the use of credit cards continues, incurring new debt, you may find yourself right where you started with the addition of home equity debt. Since this is a secured debt, your home could be at risk.
Debt Management Plans Can’t Help You
In some cases, you may work with a debt counselor who determines that your current income is not sufficient to cover the payments if you enter into a debt repayment plan. With limited options available, bankruptcy may seem to be the next logical step.
What Mistakes Might I be Making When it Comes to my Budget?
Not Having a Budget
You need to have an understanding of where your money is going. If you don’t have a system to track and monitor your expenses, you could be overspending and not know until it’s too late.
Using Credit Cards to Meet Your Cash Flow Needs
Using credit cards to fill the gap between your income and expenses is a dangerous way to manage the household budget. A better alternative is to consider what costs can be reduced and make your budget work for you.
Not Saving for Emergencies
Unexpected events are going to happen. Unforeseen home repairs, car problems, or a medical emergency can happen to anyone. Not having a rainy day fund available to cover the cost can result in the need to use credit cards to cover the costs.
Bankruptcy is an understandably stressful matter. Understanding what bankruptcy is and knowing the signs of when you may be in trouble can arm you with the information necessary to make the best financial decisions for you and your family.
Avoiding bankruptcy is always the best option. Head on over to our other topics for more information on staying away from the bankruptcy process.*
*This article provides broad and general guidelines and does not constitute professional financial or legal advice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial planning or investment decisions.
