How Does Bankruptcy Work and Is It Right for Me?

If you are overwhelmed with debt, you have probably wondered "how does bankruptcy work" so you can decide if it is a good option for you or not.

In very broad terms, bankruptcy works by giving you a legal path to a fresh financial start by eliminating unsecured debt, such as the type of debt that comes from credit cards and medical bills. Bankruptcy law is intended to give honest people who are in debt a second chance to learn how to manage their money and become debt free.

People who are sinking deep into debt often wait longer than they should have to file for bankruptcy protection because they are afraid they will have to give up everything that they own. The reality is that bankruptcy law allows for many items that you own to be exempt from your bankruptcy, which means that you can keep them.

Exemptions

Items that can be exempt from your bankruptcy will vary depending on the state that you live in, because although bankruptcy law is federal, the federal law allows each state to decide if their citizens should use the list of federal exemptions or if they have to follow a different list provided by that state.

Items that are exempt from bankruptcy are given maximum values in order to be considered for exemption. As an example, if you live in North Carolina and you are married, you can exempt up to $70,000 in equity in your home and you may keep two cars as long as they each have a value of under $3,500.

Chapter 7 and Chapter 13

For individuals and married couples, there are two types of bankruptcy protection which are used most often:

• Chapter 7
• Chapter 13

Chapter 7 bankruptcy is often referred to as the "liquidation" bankruptcy because your non-exempt assets are sold, or liquidated, in order to pay off as much of your debt as possible. Even if you don't have enough non-exempt assets to repay even a small portion of your debt, it can be forgiven or "discharged".

There are income requirements for filing Chapter 7 bankruptcy; it is not an option for every debtor. If your bankruptcy attorney determines, after analyzing your financial information that you are not eligible for Chapter 7 you can file under Chapter 13.

If you file Chapter 13 bankruptcy, your debts can be discharged after you complete a court ordered repayment plan which usually lasts three to five years. After you successfully complete the repayment plan, your remaining debt is discharged.

Is It Right For Me?

This article has just scratched the surface of what is involved in bankruptcy. It is important that you seek out a competent local bankruptcy attorney for a consultation, and discuss the pros and cons of your personal situation. Not all debt can be discharged in bankruptcy. A bankruptcy can stay on your credit report for up to 10 years, and can have a serious impact on your ability to obtain credit for many years to come. Get legal advice before you decide if bankruptcy is right for you.