Bankruptcy 101

To most individuals, the idea of contemplating bankruptcy is loaded with a certain amount of dread and anxiety, and certainly not a procedure to be taken lightly. However, if a person is facing the ongoing problems of being unable to effectively manage their financial affairs, cannot make the necessary household budget work any longer, nor keep the ever-growing list of unhappy creditors satisfied, then declaring bankruptcy may prove to be viable solution. Filing a bankruptcy petition provides an individual with the opportunity to rebuild their financial picture within the framework of a second chance to get their feet back on a solid fiscal foundation.

Understanding Bankruptcy – The Basics

While the overall principles of bankruptcy procedures and regulations are indeed complex, and it is highly recommended that working with a good bankruptcy attorney is a must, there are basic rules and stipulations an individual needs to study before taking any concrete steps toward their decision to file a petition. The first is to understand the magnitude of the effect upon a person’s credit standing and reputation, and will generally disqualify them from getting approved for a loan in the future. It is by far the single most detrimental thing anyone can do to negatively affect their credit standing, and will remain on their credit reports for as long as 7 to 10 years. The consumer should also be aware that there are a few alternatives and opportunities available to restructure their debt obligations by considering loan consolidation, asset reorganization, creditor negotiations, or simply downsizing their overall expense outlay before proceeding with bankruptcy filing.

It is important to know that Federal law governs all bankruptcy procedures, and that Federal Bankruptcy Courts have been granted unique and final authority over every aspect of the proceedings. Generally, an individual has two different options within the types of bankruptcy to be sought – Chapter 7 and Chapter 13. Which particular Chapter an individual should contemplate depends on numerous factors, such as their overall financial situation and whatever results are deemed acceptable in the final outcome. It is also important to note that there are certain obligations that cannot be discharged by the bankruptcy proceedings, such as debts due from income tax or trust funds, criminal or civil restitution’s or damages, domestic support payments, student loans, nor compensation for injuries or death caused by drunk driving. Again, proper legal guidance in these matters is critical when making these determinations.

Chapter 7 Bankruptcy

The Chapter 7 bankruptcy is the most common mechanism for filing a petition, providing the quickest outcomes and can be utilized by individuals, corporations, married partners, as well as business partnerships. Often called a ‘straight’ bankruptcy, it commences with what is termed as an asset managed liquidation proceeding, and is arranged and overseen by the court. Upon filing, the debtor surrenders all property to a court appointed trustee which is subsequently liquidated into funds to reimburse the creditors. Following this liquidation process, the debtor will receive a discharge notification, usually within four months. The Chapter 7 bankruptcy code also contains stipulations for a number of asset exemptions under federal and state laws, which allows the debtor to retain these particular assets. However, assets such as the primary car, and primary home are still subject to the debtor’s repayment obligations even if the exemptions are granted by the court. Asset exemption regulations vary from state to state, so each case requires careful research prior to making a decision in order to comply with state and federal bankruptcy codes.

Chapter 13 Bankruptcy

This particular petition filing option, Chapter 13, is referred to as the ‘reorganization’ bankruptcy, and it is structured to allow the petitioner to elect to repay their debts and obligations over a specific period of time, usually from three to five years. These proceedings are for individuals who can demonstrate predictable or continuous revenue sources that may want to protect any non-exempt property or holdings, as well as to establish a detailed restructuring strategy to meet their outstanding obligations that are no longer feasible in the current contractual framework. This petition filing option allows for a court-monitored budgeting plan to be set up that provides sufficient flexibility to pay down the debts over a specified time frame, while also allowing the debtor to remain free from any continued harassment from creditors.

Post-Bankruptcy – Rebuilding Credit

Once the successful discharge of the debtor’s obligations takes place, they can begin the all-important process of not only starting from square-one again, but create a new beginning of financial responsibility, economic security, and efficient and conscientious debt management. Within a few months the consumer can set their financial house in good order, without the over-riding burden of past mistakes. In time, and with a dedicated mind-set and proper fiscal planning, an individual’s credit score will begin to improve, lenders will become more responsive, and they can re-enter the community and marketplace with confidence, prudence, and the valuable financial wisdom gained from the experience that, ironically, only bankruptcy can provide.