The word bankruptcy is one that inspires strong sentiments yet is not often well understood. Many know that bankruptcy is usually a last-resort option to escape massive debt, but there is actually quite a lot involved. It is important to understand the basics in order to make informed decisions when and if troublesome situations arise. The first key is knowing how to properly assess your financial situation.
Questions to ask
When considering bankruptcy as an option, you are likely finding yourself in financial distress. Signs of a dangerous financial situation include:
- Making only the minimum payments on credit cards
- Frequent calls from collectors
- Uneasiness at the thought of organizing your finances
- Consistently using credit cards to pay for necessities
- Consideration of major debt consolidation
- Lack of knowledge on how much you owe
If two or more of these signs apply to you, your financial situation needs to be improved. These are all signs that you owe more than you can pay, which is exactly the meaning of bankruptcy. Of course, being bankrupt and filing bankruptcy are different. If you can’t keep up on current payments, let alone pay down existing debts, a bankruptcy filing may be a necessary option.
Bankruptcy at a Glance
When speaking about individuals as opposed to businesses, there are two primary forms of bankruptcy filing: Chapter 7 and Chapter 13.
Put simply, Chapter 7 bankruptcy involves the liquidation of assets in order to pay debts. Such assets escaping exemption include secondary properties, recreational vehicles, investment accounts, certain valuable items, and collectibles. Assets that are granted exemption and are thus generally free from being taken include home equity (at least partially and usually better protected in a Chapter 13), primary vehicle, personal items, pensions, and social security. In short, Chapter 7 bankruptcy involves the forfeiture of at least some of your assets.
It is also important to mention that some debts cannot be discharged with bankruptcy, primarily student loans, child support, and taxes.
Chapter 13 bankruptcy, on the other hand, allows you to retain assets by structuring the payment of some, or in a small percentage of cases all, of your debts over a period of three to five years. If you are in a position where you can afford to keep your primary assets if the other debts are gone, this is usually considered a better option.
Qualification
With bankruptcy, it is not a simple as picking and choosing. The courts impose a means test to determine whether you are eligible for Chapter 7 bankruptcy. Again, if the means are had for the repayment of debts over time (i.e. a Chapter 13 bankruptcy filing), that is often the preferred option. The means test first compares your average income over the previous six months with the median income for a household of your size in your state. The result determines eligibility for a Chapter 7 bankruptcy filing.
Summary of Debts
In accordance with both Chapter 7 and Chapter 13 bankruptcy, there are two primary classes of debt. The names and examples of both can be seen below:
- Secured debts are debts that include collateral as surety for the loan. Common secured debts are home mortgages and car loans.
- Unsecured debts have no collateral backing. Examples include personal loans, medical bills, and unpaid credit card balances.
If one finds one self underwater with secured debts the lenders can simply foreclose a home or repossess a car to recuperate losses. But given that unsecured debts provide little security to lenders, delinquencies on such can lead to other issues, lawsuits being one of them. If you are at risk of losing your home or car or are facing threats from creditors, it may be a good idea to seek legal counsel and discuss a possible bankruptcy solution.
At the heart of most every favorable outcome is sound legal representation. The intricacies of bankruptcy filings are numerous and complicated. If you have any questions regarding bankruptcy and your current financial situation contact us today.