How Does Bankruptcy Work?
Bankruptcy is a legal process within the jurisdiction of federal bankruptcy courts whose purpose and design is to help people and businesses eliminate some or all of their debt, or help them repay part of it.
Although bankruptcy can help you get relief from your debt, you should understand declaring bankruptcy has a long-term and serious effect on your credit rating. Bankruptcy will stay on your record for 7-10 years. It will affect your ability to open credit card accounts and get approved for loans, and possibly; increase the interest rates you pay. Bankruptcy BasicsThe bankruptcy process for both Chapter 7 and Chapter 13 is complex. Most people are not equipped to go through it on their own. So, working with a bankruptcy attorney is essential to make sure your bankruptcy filing goes smoothly and complies with all rules and laws governing bankruptcy proceedings.
Before you can file for bankruptcy, you must meet specific requirements. For example, you have to demonstrate that you are not able to repay your debts. And you have to go through credit counseling with a court-approved credit counselor. That counselor will assist you in taking stock of your finances, look at any possible alternatives to bankruptcy, and help you make a personal budget. Then, if you decide to go forward and file for bankruptcy, you'll need to decide which type of bankruptcy to file: normally either Chapter 7 or Chapter 13. Both types can help you eliminate unsecured debt like credit cards, stop a home foreclosure or other repossession, and halt wage garnishments, utility cuts and other debt collection actions. You are expected to pay your own court costs and attorney fees. But before going forward, you need to know the different ways that the two types of bankruptcy work to relieve debt. First, you should familiarise yourself with the following terms used in the bankruptcy process. |
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Bankruptcy Terms to Know
During your bankruptcy process, you'll see legal terms specific to bankruptcy proceedings you will need to know. These are the most frequently used ones:
Bankruptcy trustee: The trustee is a person or corporation who is appointed by the court to act on behalf of your creditors. The trustee will review your (the debtor's) bankruptcy petition, liquidate (sell) your assets in Chapter 7 filings, and distribute whatever proceeds there are to your creditors. In a Chapter 13 filing, your trustee will also oversee your creditor repayment plan, receive payments from you, and disburse that money to your creditors.
Credit counseling: Before filing for bankruptcy, you'll be required to meet with a credit counselor. Once you have actually filed, you'll need to finish a course in personal financial management prior to the discharge of your bankruptcy. In some situations, both requirements may be waived.
Discharged bankruptcy: When bankruptcy procedures are finished, your bankruptcy will have been "discharged." In Chapter 7, this happens after the trustee has sold you assets and paid your creditors from the proceeds. Under Chapter 13, it happens after you finish your repayment plan.
Exempt residential property: Although both kinds of personal bankruptcy can require you to sell possessions to pay creditors back, some property might be exempt from sale. Each state's law dictates what a debtor might be permitted to keep. Assets such as work tools, your vehicle, or the equity in your residence might be exempt from sale.
Lien: This is a legal device and process allowing a creditor to sell a debtor's real property for to repay a debt.
Liquidation: Sale of a debtor's property which is non-exempt (that you cannot keep). This converts assets into "liquid" cash — which can then be paid out to creditors.
Means Test: The Bankruptcy Code requires that individuals filing Chapter 7 bankruptcy show they do not have the means to repay their financial obligations. The purpose of the requirement is prevent abuse of the bankruptcy law. The test considers income, properties, expenses and unsecured financial obligations. If a debtor cannot pass the means test, their Chapter 7 personal bankruptcy might either be dismissed or converted into a Chapter 13 case.
Reaffirmed Account: In Chapter 7, you can decide to keep paying a debt that could otherwise be discharged by the bankruptcy. Reaffirming the account--and your commitment to pay the debt--is typically done to allow a debtor to continue to own collateral, such as a vehicle, that would otherwise be taken by the trustee as part of the bankruptcy proceedings.
Secured Debt: A financial obligation backed by an asset or possessions ("collateral" or "security") which can be reclaimed by a creditor. For example, your home mortgage is backed by your house. With an automobile loan, the vehicle itself is the security. If you default on the loan, financial institutions of secured debt can legally seize the collateral.
Unsecured Debt: A financial obligation where your lender does not holds any concrete collateral, such as charge card.
Bankruptcy trustee: The trustee is a person or corporation who is appointed by the court to act on behalf of your creditors. The trustee will review your (the debtor's) bankruptcy petition, liquidate (sell) your assets in Chapter 7 filings, and distribute whatever proceeds there are to your creditors. In a Chapter 13 filing, your trustee will also oversee your creditor repayment plan, receive payments from you, and disburse that money to your creditors.
Credit counseling: Before filing for bankruptcy, you'll be required to meet with a credit counselor. Once you have actually filed, you'll need to finish a course in personal financial management prior to the discharge of your bankruptcy. In some situations, both requirements may be waived.
Discharged bankruptcy: When bankruptcy procedures are finished, your bankruptcy will have been "discharged." In Chapter 7, this happens after the trustee has sold you assets and paid your creditors from the proceeds. Under Chapter 13, it happens after you finish your repayment plan.
Exempt residential property: Although both kinds of personal bankruptcy can require you to sell possessions to pay creditors back, some property might be exempt from sale. Each state's law dictates what a debtor might be permitted to keep. Assets such as work tools, your vehicle, or the equity in your residence might be exempt from sale.
Lien: This is a legal device and process allowing a creditor to sell a debtor's real property for to repay a debt.
Liquidation: Sale of a debtor's property which is non-exempt (that you cannot keep). This converts assets into "liquid" cash — which can then be paid out to creditors.
Means Test: The Bankruptcy Code requires that individuals filing Chapter 7 bankruptcy show they do not have the means to repay their financial obligations. The purpose of the requirement is prevent abuse of the bankruptcy law. The test considers income, properties, expenses and unsecured financial obligations. If a debtor cannot pass the means test, their Chapter 7 personal bankruptcy might either be dismissed or converted into a Chapter 13 case.
Reaffirmed Account: In Chapter 7, you can decide to keep paying a debt that could otherwise be discharged by the bankruptcy. Reaffirming the account--and your commitment to pay the debt--is typically done to allow a debtor to continue to own collateral, such as a vehicle, that would otherwise be taken by the trustee as part of the bankruptcy proceedings.
Secured Debt: A financial obligation backed by an asset or possessions ("collateral" or "security") which can be reclaimed by a creditor. For example, your home mortgage is backed by your house. With an automobile loan, the vehicle itself is the security. If you default on the loan, financial institutions of secured debt can legally seize the collateral.
Unsecured Debt: A financial obligation where your lender does not holds any concrete collateral, such as charge card.