Bankruptcy Debt Help for Chapter 7 or Chapter 13 individuals. Does it work?
Bankruptcy is an option which allows people to reduce or eliminate their debt by liquidating assets or developing a repayment plan. While there are six bankruptcy chapters, only two address personal finances -- Chapter 7 and Chapter 13. The remaining chapters relate to corporate and government entities.
Chapter 7 bankruptcy requires individuals to surrender their assets to the Bankruptcy Court. A Trustee is assigned and oversees the sale of assets. Monies collected are used to repay creditor debts. In essence, Chapter 7 erases all debt, but the individual loses most, if not all, of their valuable property including real estate and automobiles.
Chapter 13 bankruptcy allows individuals to keep their assets. However, a repayment plan must be approved through the court. A Trustee is assigned to distribute payments to creditors. The individual filing Chapter 13 is not allowed to take on any new debt during the repayment plan unless approved by the Trustee.
Previously, the majority of people filing bankruptcy opted for Chapter 7. However, in 2005 President Bush signed the "Bankruptcy Abuse Prevention and Consumer Protection Act"; making it considerably more difficult to file either chapter. BAPCPA states, "Americans who have the ability to pay will be required to pay back at least a portion of their debts." Additionally, individuals are now required to wait eight years before filing again.
Today, individuals must obtain credit counseling through an agency approved through the U.S. Trustee Program. This program was established to help individuals determine if bankruptcy is in their best interest. The only way to obtain bankruptcy discharge is to submit proof of counseling to the court.
When filing Chapter 7, individuals must first pass "the means test" to determine if they have disposable income to repay creditors under the Chapter 13 plan. Each state within the U.S. determines the median income per capita. In order to qualify for Chapter 7 under BAPCPA, income must be equal to or less than the individual's state median income level.
BAPCPA dictates individuals filing Chapter 13 must commit all of their disposable income to repay creditors. When the filers' income is higher than their states median income level, disposable income is calculated using allowed expenses governed by the Internal Revenue Service.
As you can see, filing bankruptcy is no easy task. Therefore, it's crucial to consult with an attorney well-versed in bankruptcy laws. While BAPCPA was intended to protect consumers, the new laws are too complex for individuals to file bankruptcy on their own. Doing so could lead to severe consequences and cause the individual to fail out of bankruptcy.
Attempt to work out a repayment plan with creditors prior to contacting a bankruptcy lawyer. Oftentimes, creditors will extend terms, reduce interest rates or adjust the balance due in order to help debtors avoid bankruptcy. To increase the potential for successful negotiation, offer an upfront payment along with a reasonable repayment plan.
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