As personal bankruptcies continue to rise in the United States you may find yourself in a position where you're considering exercising the option to relieve financial stress. But before you make that choice there are some basic things you need to know. In this article we'll talk about some of these things and hopefully help guide you to the right decision. Be aware however, that personal bankruptcy protection should always be a last resort - after you've exhausted all other options. There are plenty of negative consequences that come with this decision so you need to think it through carefully.
Bankruptcy Definition
In the simplest terms possible, bankruptcy is a condition in which an individual, nonprofit, or business entity finds itself unable to repay its debts. This is most often caused by an over extension of credit that is not met suitably by current income streams. As the individual or institution begins to experience financial pressure brought on by limited income, the temptation to use credit to continue daily operations only makes the problem worse.
In the U.S. bankruptcy protection is the domain of the federal government via Article 1, Section 8, Clause 4 of the United States Constitution. By the authority of the Constitution Congress has put forth common bankruptcy laws that govern these proceedings in a general manner. However, federal legislation yields to state legislation in cases where the law fails to address specific areas of need. Therefore, personal bankruptcy proceedings do vary to some degree from one state to another. That being said, all personal bankruptcy filings are made in U.S. bankruptcy court.
Types of Bankruptcy Proceedings
According to the federal code there are six different types of bankruptcy proceedings available in the United States. They are designated with "chapter" names according to the chapter of the code they are found in. The two most common forms used for personal bankruptcy protection are known as Chapter 7 and Chapter 13. Of the two options which is best for you will depend on your current circumstances. A lawyer will be able to help guide you through the decision-making process.
Chapter 7 bankruptcy is the simplest and most often used for personal protection. It is often known as "straight bankruptcy" due to the fact that the rules governing it are so simple. With this type of proceeding an individual surrenders all of his assets that are not exempt to the court, which will then turn around and liquidate them for the purposes of paying off creditors. The court determines how much each creditor receives and whether or not to discharge the remainder of the individual debt.
Chapter 13 bankruptcy is a bit more complicated and is designed for individuals who meet certain income levels and whose debt does not exceed a court appointed limit. This type of proceeding is commonly known as a "rehabilitation" because it allows the individual to retain ownership of his assets while paying off his debts through a predetermined payment plan. As a general rule, Chapter 13 personal bankruptcy protection dictates a repayment plan of about 3 to 5 years.
Debt Settlement Option
Though not always, bankruptcy courts will often ask individuals if they have considered debt settlement instead of bankruptcy protection. It's not uncommon for these courts to insist individuals attempt settlement before they will grant the bankruptcy. Debt settlement is the preferred method because it forces the individual to be responsible for his debts while at the same time satisfying creditors who are reluctant to lose large amounts of money.
With debt settlement, an individual avails himself of the services of a qualified agency who will negotiate with creditors on his behalf. These negotiations usually result in reduced interest charges, lower monthly payments than the individual is currently making, and sometimes even a lowering of the principle owed on some debts. Once a debt settlement plan is reached between an individual and his creditors, the financial pressure should be alleviated as long as he is faithful to that plan.
Use a Qualified Attorney
If you should decide to go down the bankruptcy path be sure to use a qualified attorney. Most courts will not give you the time of day if you try to represent yourself in the matter, because it is far too complicated. Personal bankruptcy protection requires someone who is knowledgeable of the law, experienced with the system, and best able to represent you in bankruptcy court.