If you are facing a dire financial situation, there is a chance that filing for bankruptcy protection has crossed your mind. If this is the case, there are a few things that you should know about. First and foremost, you need to understand the different types of bankruptcy that are available to you.
There are three common chapters of bankruptcy that are often spoken about. They are Chapter 7, Chapter 11, and Chapter 13. If you end up filing bankruptcy, it's virtually a certainty that it will be one of these three chapters. The chapter that you will ultimately choose depends on many complex legal and financial factors, so it's difficult to accurately determine which one is best for you without careful analysis. But hang on -- don't reach for the calculator just yet -- first, it's important that you have a basic understanding of each chapter's purpose, their consequences, and the differences between them.
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Often referred to as a liquidation bankruptcy, the most common form of bankruptcy is Chapter 7. In a Chapter 7 bankruptcy, you will be able to discharge all of your debts that are eligible. Certain debts such as student loans, child support, and some tax obligations are un-dischargeable; meaning that you will still owe these debts upon conclusion of the bankruptcy.
The reason that Chapter 7 is referred to as a liquidation bankruptcy is because of the way in which your assets are handled. Yes, unfortunately, they are liquidated. All assets that are not exempt are auctioned away and the proceeds are distributed among your creditors. Each and every state has its own rules and procedures as to what assets you will be able to exempt or keep out of the hands of the bankruptcy trustee. A good example of this is Florida's homestead exemption. In Florida, your primary home, or homestead, is exempt from a Chapter 7 bankruptcy; and as such, will not be taken and liquidated by the trustee. In practice, many Chapter 7 bankruptcies are asset-free once all of the available property exemptions are made.
The second most common type of bankruptcy is a Chapter 13. This is often referred to as a repayment or reorganization bankruptcy. When a person files under this chapter, their attorney will look at their current financial situation and develop a plan for repayment of debts over the course of three to five years. The monthly payments will be made to the bankruptcy trustee and paid on a proportionate share based on priority status of the creditors.
Determining the monthly payments is a complex event. You will need to look at your current income and any expected income, then subtract out reasonable and ordinary expenses such as rent, electrical bills, food expenses, etc. At this time you will be left with what is called disposable income, and that money will be used to pay the creditors as they stand on the preferred payment order. In many Chapter 13 bankruptcies your unsecured creditors will need to take a total payment amount that is less than the current balance of the debt.
The other bankruptcy that is common is a Chapter 11 bankruptcy. This is very similar to a Chapter 13, but is used mostly for corporations. With the recent economic downturn many companies have sought protection and debt restructuring under this chapter of the bankruptcy code. Some of the more famous are Blockbuster Video and General Motors.
Now that you've been introduced to the most common chapters, you should have a better understanding of bankruptcy and the direction you're heading in. If you feel overwhelmed with information, don't worry, that's completely normal. Bankruptcy is a complex legal process and its full comprehension is a daunting challenge. Luckily, there's no shortage of lawyers and financial consultants available to help.
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