Eliminating Debts through Bankruptcy

With the economic crisis causing major financial problems for people around the country and the world, many are looking for ways to solve debt problems and get back on track, financially. Although some are stigmatized by the thought of filing for bankruptcy, in many cases bankruptcy may be the best option. Those who are thinking of filling for bankruptcy often ask their bankruptcy lawyers whether or not their existing debts will be automatically eliminated when they file for bankruptcy. This is a major concern for consumers, because piling debts play a big role in financial instability. If those debts are eliminated by filing for bankruptcy, then it can put consumers in a great position to have a fresh financial start. So, does declaring bankruptcy eliminate all debts? A simple answer is that it depends on the situation and the kind of bankruptcy you file for.

Basically, there are two types of filings for personal bankruptcy. The first is called chapter 7 liquidation bankruptcy and the second is called chapter 13 debt adjustment bankruptcy. Depending on the type of bankruptcy you declare, everything from the filing procedures to the settlement details will differ. The debtors have to make the decision on whether to file for chapter 7 or 13 bankruptcies, based on their situation. In most cases, chapter 13 bankruptcy cases are only for those who still have a steady flow of income, such as a job. This is because chapter 13 bankruptcy cases are meant to restructure the debt, meaning that the debtor will still have to make monthly payments based on their income. Chapter 7 liquidation bankruptcy cases, on the other hand, are better designed toward helping those who don't earn wages.

Understanding chapter 7 liquidation bankruptcy

To better comprehend the possibilities of eliminating your debts, it's best to first understand each kind of bankruptcy. Chapter 7 liquidation bankruptcy filings are probably the best option for those who want to eliminate all of their debts in one go. This chapter of bankruptcy is designed to help those who are truly devastated, financially. For example, if you have experienced a recent lay-off from your job and your debts start to build up, you know that you are feeling the crunch of the economic crisis and bankruptcy may be the best choice. Especially these days, when prices are skyrocketing and it's difficult to get a job, losing your job may be the biggest blow to your finances and your way of life. In these cases, when you have no source of income and your debts continue to mount, you should definitely consider filing for chapter 7 bankruptcy.

Filing for bankruptcy under chapter 7 is probably your best chance of eliminating all or most of your debt. When you declare chapter 7 bankruptcy, all of your assets are put under the control of a trustee. The trustee is then responsible for liquidating these assets into cash. The resulting amount of money gained from the liquidation of the debtor's assets is then used to pay off the creditors. Depending on the amounts and kinds of debt, the money is distributed among these creditors. In some cases, some of the assets belonging to the debtor can be exempted from liquidation. In most cases, however, chapter 7 bankruptcy cases have little to no exemptions, meaning that the debtor is left with no assets, but a fresh financial start. In most cases, a large portion of the payments go to creditors who have unsecured claims and those under secured claims receive an amount relative to the liquidated secured assets. For creditors to make claims on a bankruptcy, they must present proof of these claims to the bankruptcy court.

The reason that chapter 7 cases are the best way for debtors to eliminate their debts is because debtors who declare chapter 7 bankruptcy will no longer be responsible for paying off their debts to creditors. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) contains a lot of information on which debts are considered dischargeable, who is eligible to file for bankruptcy, and other laws and regulations on bankruptcy. Here are some of the requirements for eligibility to file for chapter 7 liquidation bankruptcy:

1. The debtor must take the "means test" to determine if the debtor's income falls under the average income of the state in which the debtor lives.

2. Certain state laws regarding whether or not the debtor is married and with children, as well as how many people live in the debtor's household, will also have an effect on eligibility and dischargeable debts. Each state also has different income standards or income threshold in relation to filing for bankruptcy cases.

Understanding chapter 13 debt adjustment bankruptcy

If the debtor fails to qualify for chapter 7 liquidation bankruptcy, the individual will have to file for bankruptcy under chapter 13 debt adjustment bankruptcy. Basically, chapter 13 bankruptcy is designed to aid debtors who still have a reasonable amount of regular income. When a debtor's income is above the state average, as determined by the "means test," the debtor's only other bankruptcy option is chapter 13. Instead of liquidating all or most of your assets like chapter 7 filings, chapter 13 bankruptcy allows you to hold on to important assets, such as your home or automobile. Instead of eliminating your debts altogether, declaring for chapter 13 bankruptcy will allow you to propose a debt repayment scheme to the court. A court hearing will determine whether or not your debt repayment plan will be approved.

When planning your debt repayment scheme, it's important to remain reasonable and rational, otherwise your filing may be disapproved. The best way of planning your repayment is to create a repayment plan to cover a three to five-year period, with low and reasonable monthly payments. The criteria for the approval of your repayment plan is stipulated in the Bankruptcy Code. In other words, an approved chapter 13 bankruptcy filing will still require you to pay off your non-discharged debts, but you will receive legal protection against creditor actions, such as suing, collection, or garnishments.

If you've decided to file for bankruptcy but don't know where to start, just fill up the form in this page and get a 100% free consultation service from experienced bankruptcy lawyers.

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