US BANKRUPTCY LAW

Most people face financial hardship at some point in their lives. Be it from divorce, job loss or insufficient budget planning, finding yourself over your head in debt can be a stressful reality to deal with. Although creditors are not usually helpful when you’re in trouble, a first step should always be to contact them and try to arrange a new payment plan.

If that fails and your financial situation seems unlikely to improve in the near future, all hope is not lost. That’s where bankruptcy comes into play. When your debt exceeds your income and the bill collectors are calling - it may be time to consider bankruptcy. Bankruptcy is a voluntary legal declaration of financial insolvency. Through court intervention, the process of bankruptcy can stop collections and clear or reorganize debt.

WHAT HAPPENS IN BANKRUPTCY?

The legal effect is to divert most of the debtor's assets & debts to the administration of a third person - called a "trustee in bankruptcy" - from which outstanding debts are paid pro rata. Bankruptcy forces the debtor into a statutory period during which his or her commercial and financial affairs are administered under the supervision of the trustee.

Bankruptcy usually involves the removal of several special legal rights such as the right to sit on a board of directors or, for some professions that form part of the justice system, to practice, such as lawyers or judges. Commercial organizations usually add other non-legal burdens upon bankrupts such as the refusal of credit. The duration of "bankruptcy" status varies from state to state but it does have the benefit of erasing most debts even if they were not satisfied by the sale of the debtor's assets.

TYPES OF PERSONAL BANKRUPTCY

You can choose “straight" bankruptcy (Chapter 7) or “reorganization" bankruptcy (Chapter 13) to put a halt to debt collection through court intervention and get your finances back on track.

Chapter 7 Bankruptcy is the most common form of bankruptcy for individuals whose debt obligations exceed their income (or close to it). Not only can it discharge and eliminate unsecured debt, such as credit card balances, it also protects you from creditors in the process. Under Chapter 7 bankruptcy, you’re granted an “automatic stay”, which halts collection attempts and prevents wage garnishing, repossessions, foreclosures and utility cut-offs.

Once filed, bill collectors may not attempt to collect from you or take any action against you without the court’s permission. In exchange, your assets are examined by the court for possible liquidation to replay your debt. But since the majority of people going through Chapter 7 Bankruptcy are already insolvent, they retain most, if not all, of their possessions. You won’t be able to hold on to a car while getting the outstanding loan for that car discharged, for example, but neither will the court sell a car you need for work to pay off a department store credit account.

The process takes about four to six months and usually requires only one appearance in court. You’ll be required to provide information about your income, your assets and your debt, so the court can make an assessment of your financial situation and qualify you for bankruptcy. Once the court issues a final discharge, creditors are barred from ever collecting on those debts.

Chapter 13 Bankruptcy reorganizes debt into a workable repayment plan (usually over 3-5 years). Upon filing for Chapter 13, the court will issue an automatic stay, preventing further collections from creditors. Some unsecured debt may be reduced or discharged, but repayment is the goal. If you’ve run into serious financial difficulties, but have a stable income - enough to cover your debt payments - and secured assets worth protecting from liquidation (such as a home in danger of foreclosure), Chapter 13 Bankruptcy is probably the right option.

Like Chapter 7, this code also halts collections, foreclosure proceedings and the like, which allows the debtor time to catch up payments before entering reorganization. 100% repayment is not always required and some unsecured debt may be reduced or discharged. The total amount you pay will depend on how much you owe, the type of debts you have and your court’s opinion.

The court will require a reasonable monthly budget from you, focused on necessary living expenses and debt payment. Creditor approval of your repayment plan is not usually required, but if your budget isn’t strict enough, the court may challenge it and, in some cases, even create your budget for you.