What is Involved with Filing Personal Bankruptcy?

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If you are thinking about filing for bankruptcy, there are some issues that you will need to consider before you make any important decisions. For one, you will need to determine which type of bankruptcy protection is best for your financial situation.

Chapter 7 vs. Chapter 13. Which is Best for Me?

Chapter 7 and chapter 13 are the two most common options for filing personal bankruptcy. There are advantages to both, and it depends very much on your income and debts which is best for you.

When to File Chapter 7 Bankruptcy

For people who have very little income, and few assets, chapter 7 bankruptcy may be the best option. In a chapter 7 bankruptcy proceeding, the bankruptcy trustee will evaluate all your assets, and liquidate (sell) those which are not protected by your states bankruptcy exemption laws. All your debts in a chapter 7 bankruptcy case are eliminated, or discharged, and you will not have to repay them.

The Chapter 7 Means Test

In order to be eligible for chapter 7 bankruptcy, you will need to pass the means test. This test will take into account your income levels to find out if you have the “means” to repay your debts. if you fail the bankruptcy means test, you will need to file a chapter 13 bankruptcy instead.

When to File Chapter 13 Bankruptcy

For those debtors that have a regular income, a chapter 13 bankruptcy offers a lot of unique options for settling debt and regaining financial freedom. chapter 13 bankruptcy involves a repayment plan setup by the bankruptcy court. Usually, the interest on debt will be significantly reduced to lower your payments. Also, some debt, such as auto loan debt and mortgage principle, may be “crammed down” to fair market value, further lowering your monthly payments.

Chapter 13 Can Fight Foreclosure

For those people facing foreclosure, both types of bankruptcy will stop a foreclosure proceeding, but chapter 13 offers another unique option. You can stop a foreclosure and stay in your home during the bankruptcy proceeding, during which a reasonable repayment plan will be worked out, including a significantly reduced interest rate.

Options for Investment Property

For rental property or other investment real estate, you may be able to “cram down” your mortgage principle to the market value of your house. This means, if you bought a house for $250,000, but it is now worth only $150,000, your bankruptcy lawyer may be able to force the mortgage company to “cram down” the principle, thereby eliminating $100,000 of debt while allowing you to keep the property.

Impact on Your Credit Score

Additionally, a chapter 13 bankruptcy does not impact your credit rating as much as a chapter 7 bankruptcy does. In some cases, your credit rating will actually go up during the course of your chapter 13 repayment plan.

What Happens Once You Decide to File Bankruptcy?

Talk to a Lawyer

Before you do anything, talk to one or two bankruptcy lawyers to find out the best strategy to keep as much of your property as possible while eliminating your debt. Bankruptcy laws are complicated and always changing, so you need someone who deals with bankruptcy laws to give you guidance and represent you in court, where your creditors will be trying to regain their money from you.

Credit Counseling

Before you can file for bankruptcy protection, you will need to attend a qualified credit counseling class. You will receive a certificate that will allow you to file for bankruptcy protection. Your bankruptcy lawyer will tell you where the best classes are.

Meeting of the Creditors

One of the first court appearances will be the 301 Meeting. At this meeting, your creditors and your bankruptcy attorney will appear in front of the bankruptcy judge to work out the details of your case. Your lawyer will fight to remove your debt and help you keep your property.

Bankruptcy Discharge

The bankruptcy discharge is the time at which all your debt is eliminated. In a chapter 13 case, the discharge occurs once your repayment plan is completed. In a chapter 7 case, the discharge occurs once the asset liquidation has been completed by the bankruptcy trustee.

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