The Importance of Good Bankruptcy Preparation

As many individuals face mounting debt in a declining economy, they may consider bankruptcy as a way to get out from under. Bankruptcy is a federal right that allows debtors a "fresh start" and a way to discharge debts. It also tolls efforts from persistent creditors seeking payment. If you are one of those considering filing bankruptcy, you should prepare to ensure that you avoid unnecessary obstacles that hold up proceedings.

What Bankruptcy Can Do

Knowing your financial goals is very important. What are your expectations from a bankruptcy? Although bankruptcy may be the answer for many, it does not totally resolve all of your financial problems and may not be the right course for everyone. To be sure that this is the right road for you, here are some of the things that bankruptcy can do:

Stop debt collection harassment
Stop immediate foreclosure of your home
Stop wage garnishments proceedings
Stop your car or other property from being repossessed or force a creditor to return property after repossession.
"Discharge" your legal obligation to pay most or all of your debts.

What Bankruptcy Can't Do

Eliminate certain secured debts such as car loans and home mortgages. Bankruptcy allows you to pay these off over a certain period of time. You may only retain the collateral if you continue to pay the debt.
Discharge certain types of debts, such as child support, alimony other divorce-related debts, most student loans, criminal fines and restitution, and most state and federal taxes.
Discharge debts that arise after the bankruptcy has been filed.

What Bankruptcy is Best?

The most common personal bankruptcy actions are Chapter 7 and Chapter 13. Choosing which one is the best for you depends on what your ultimate goal is. If you want to discharge your debts and you have a certain value of assets, you may seek a Chapter 7 liquidation. However, if you want to retain your assets and still satisfy your creditors, you may consider filing Chapter 13. Below are summaries of each proceeding.

Chapter 7

Known as the "liquidation or fresh start" bankruptcy you may discharge your debts under Chapter 7. Non-exempt property must be turned over to a bankruptcy trustee who will sell off the assets and distribute the proceeds to rightful creditors. This proceeding allows you to retain certain property under federal and/or state laws; these are called exempt property and may include secured debt, homestead, personal property such as clothing, jewelry, real property, tools of trade, the face value of insurance policies, and certain retirement funds and annuities.

Chapter 13

Under Chapter 13, you may restructure or "reorganize" your debt while retaining all of your assets. However, you must have a certain level of income to be able to sustain yourself and pay off your creditors within three to five years. You will have to make monthly payments as well as payment toward debts in arrears. Usually that will be the regular monthly payments plus a payment toward the arrears.

How Bankruptcy Affects Your Credit Rating

A bankruptcy proceeding will remain on your credit report for 10 years. However, late payments and unpaid debts remain on your credit rating for 7 years. You must decide which is the most disadvantageous for you. Even if you file bankruptcy, you may still be able to get credit in the 10 years following. You will pay a highter interest rate though.

Find an Attorney

Consulting an experienced bankruptcy attorney is part of good bankruptcy preparation. A bankruptcy attorney will help you fill out the requisite paperwork and applications, help you with your documentation and represent you during every phase of the proceedings. Talk with an attorney regarding bankruptcy preparation.