First, the definition: bankruptcy is a legal declaration of one’s inability to pay off large amounts of debt. When an individual declares bankruptcy, the bankruptcy court will clear the individual of responsibility for those debts which are legally dischargeable. Under United States bankruptcy law, two forms of bankruptcy available to individual debtors are chapter 7 bankruptcy and chapter 13 bankruptcy (chapter 11 filings are possible for an individual, but uncommon).
Chapter 7 bankruptcy is the most common kind of bankruptcy in United States. The best benefit of Chapter 7 bankruptcy and site all dischargeable deaths are immediately wiped out — you don’t have to wait or pay off any remaining debts (at least the ones that are legally dischargable).
Reorganization bankruptcy, or Chapter 13 bankruptcy, results in a payment plan which allows the debtor to repay their debts over an extended period of time under more reasonable terms. To qualify for chapter 13 bankruptcy, a debtor must have a steady source of income with which to repay their creditors. One advantage of Chapter 13 bankruptcy is that the debtor may be allowed to keep assets which would have been liquidated under chapter 7 bankruptcy.
Don’t think chapter 13 bankruptcy is a complete easy street. However, here are a few examples of the kinds of debts which can only be cleared under Chapter 13 bankruptcy -Debts from a divorce or settlement agreement -Court fees -Home Owners Association, condominium, or coop fees -Retirement plan loans -Non dischargeable tax debts -Debts from a previous bankruptcy
Debts which are not dischargeable by any means include: – Domestic support obligations, such as alimony and child support payments – Student loans, except in cases of undue hardship – Debts incurred by acts of fraud – Debts which arise from willful or malicious acts – Criminal penalties – Intoxicated driving debts
Income tax debts can be discharged; however, certain circumstances must be met. For such debts to be discharged, the debtor must have filed a tax return for the tax year in question; the debt must arise from a tax return filed at least two years before the filing; the debt must arise from a tax return that was due at least three years before the filing; and the taxing authority must not have assessed the debtor’s liability for the taxes within the last 240 days.
Bankruptcy filings require that the debtor report all creditors and their addresses; debts which are not listed cannot be discharged. If the creditor has moved without providing a forwarding address, or the notice is lost in the mail or notice cannot be sent for any reason out of the debtor’s control, the debt will be wiped away as long as it is legally dischargeable. However, debts which cannot be assessed for reasons which are under the debtor’s control (e.g. the debt is not listed or the address given is incorrect) may not be discharged.
Filing bankruptcy doesn’t mean that your financial life is over. you may still have liens on your house, but at least now no one will be a double to garnish your wages or access your bank account. Do expect to have difficulty getting loans. Cash is going to be your best friend for the next few years.
Bankruptcy can be a reasonable solution if you are drowning in debt. Just don’t view it as a magic cure-all that won’t have any consequences. One of the biggest problems of bankruptcy, is it gives you an immediate cure, but doesn’t necessarily do anything to solve the underlying issues that got you in debt in the first place.