Going Bankrupt: Not Just a Saying
Bottom line up front, Bankruptcy is bad m'kay!? Seriously, this is the last thing you want to do if you are having financial troubles. You are much better off trying to use a commercial debt consolidation agency or trying to argue better loan terms with your creditors. Bankruptcy will ultimately destroy your credit and make it extremely hard to secure any future loans. But here are the basics of it...
What happens when you have no money, not enough or zero income, and your debts and bills still need to be paid? You go bankrupt and no, that is not just an idiom. It is actually a legal matter that you file with the federal court system under the federal bankruptcy code, and for individuals specifically chapter 7 or chapter 13.
Chapter 7 filing is the greater of the two evils that individuals can file, to be eligible for Chapter 7 you must be in this case an individual, partnership, corporation or other business entity. Your income must not be equal to or over the median income for your state, if it is then you are subject to a test to determine if your filing is abusing the use of bankruptcy. If the test is not passed your bankruptcy will either be converted to Chapter 13 or be dismissed.
What happens under chapter 7 bankruptcy? It includes the liquidation of all eligible assets in an effort to pay off a debtors creditors, note that there are assets that are exempt from liquidation. The exemptions include things that will help you get back on your feet such as dwellings, transportation, household goods, clothing, and retirement accounts. These exemptions usually have a cap on value for instance in Ohio they include:
Chapter 7 filing is the greater of the two evils that individuals can file, to be eligible for Chapter 7 you must be in this case an individual, partnership, corporation or other business entity. Your income must not be equal to or over the median income for your state, if it is then you are subject to a test to determine if your filing is abusing the use of bankruptcy. If the test is not passed your bankruptcy will either be converted to Chapter 13 or be dismissed.
What happens under chapter 7 bankruptcy? It includes the liquidation of all eligible assets in an effort to pay off a debtors creditors, note that there are assets that are exempt from liquidation. The exemptions include things that will help you get back on your feet such as dwellings, transportation, household goods, clothing, and retirement accounts. These exemptions usually have a cap on value for instance in Ohio they include:
- Homestead: $132,900
- Vehicle: $3,675 in one vehicle
- Household goods: $12,250 with up to $575 in one item
- IRAs (including ROTH): $1,171,150
While this may sound like a good option you are still losing assets and may potentially lose the assets that you think might be exempt because they are over the value limit for that specific exemption.
If you still choose to file for chapter 7 you must give a petition to the bankruptcy court that includes multiple forms that require you to know: your creditors and the amount you owe them, income (source, amount, frequency), your property, your monthly expenses, and several other financial schedules (detailed lists in well organized manner), and a tax return. It also costs you money to file for chapter 7, $245 to file the case, $75 admin fee, and a $15 trustee fee (the person that liquidates your assets). There are also a wide range of nuances in the chapter 7 filing that could eventually still allow for loss of exempt property as well.
The lesser of the two evils is chapter 13 bankruptcy. It essentially makes a plan to pay off your creditors in three to five years, three if you make less than median monthly income of your state (or have cause for longer) and five if you make over the median monthly income of your state. Your liabilities must not exceed $383,175 in unsecured debt (debt not backed up by collateral) and $1,149,525 in secured debt. You also must have been to credit counseling in the last 180 days (this applies to chapter 7 as well). Just like Chapter 7 you must submit a petition with all the same schedules, this is important in Chapter 13 because this information is used to notify your creditors to stop or not start their collection actions during the period of bankruptcy. There are also fees, $235 to file and $75 admin fee.
If approved the debtor must submit a payment plan to the courts with the petition or within 14 days of filing. The debtor then has 30 days to make his first payment even if the payment plan hasn't been approved of yet. The payments will be submitted by the debtor to the trustee for distribution to the creditors which usually aren't paid in full unless they are a priority creditor such as a tax collection agency.
Chapter 13 allows the debtor to stop all collections against their assets or property by creditors. This allows the debtor to keep much needed property such as housing and transportation, however this doesn't mean the debtor can pay the smallest amount possible. Priority debts will more than likely be paid in full unless the creditor agrees otherwise. Secured debts will have the outstanding payments paid off in full during the bankruptcy period and continue to pay throughout the life of the debt (typical of home mortgages). However smaller secured debts may be reduced to the liquidation value of the collateral borrowed against. If your payment plan is violated the court may convert your case to a chapter 7 and your assets would be liquidated or it may be dropped altogether and you would no longer have collection protection.
Now that we know bankruptcy is bad hopefully you will be more careful about going into debt in the first place. The easiest way to go into debt is to not take out any loans or arguing for better terms with whoever is trying to loan you money. What is the worst that could happen? They say no and you move on to the next bank that may or may not agree to your terms. After all they should fight to get your business since you are paying them more money than you took from them in the first place. But don't take my word for it...do your own research.
The lesser of the two evils is chapter 13 bankruptcy. It essentially makes a plan to pay off your creditors in three to five years, three if you make less than median monthly income of your state (or have cause for longer) and five if you make over the median monthly income of your state. Your liabilities must not exceed $383,175 in unsecured debt (debt not backed up by collateral) and $1,149,525 in secured debt. You also must have been to credit counseling in the last 180 days (this applies to chapter 7 as well). Just like Chapter 7 you must submit a petition with all the same schedules, this is important in Chapter 13 because this information is used to notify your creditors to stop or not start their collection actions during the period of bankruptcy. There are also fees, $235 to file and $75 admin fee.
If approved the debtor must submit a payment plan to the courts with the petition or within 14 days of filing. The debtor then has 30 days to make his first payment even if the payment plan hasn't been approved of yet. The payments will be submitted by the debtor to the trustee for distribution to the creditors which usually aren't paid in full unless they are a priority creditor such as a tax collection agency.
Chapter 13 allows the debtor to stop all collections against their assets or property by creditors. This allows the debtor to keep much needed property such as housing and transportation, however this doesn't mean the debtor can pay the smallest amount possible. Priority debts will more than likely be paid in full unless the creditor agrees otherwise. Secured debts will have the outstanding payments paid off in full during the bankruptcy period and continue to pay throughout the life of the debt (typical of home mortgages). However smaller secured debts may be reduced to the liquidation value of the collateral borrowed against. If your payment plan is violated the court may convert your case to a chapter 7 and your assets would be liquidated or it may be dropped altogether and you would no longer have collection protection.
Now that we know bankruptcy is bad hopefully you will be more careful about going into debt in the first place. The easiest way to go into debt is to not take out any loans or arguing for better terms with whoever is trying to loan you money. What is the worst that could happen? They say no and you move on to the next bank that may or may not agree to your terms. After all they should fight to get your business since you are paying them more money than you took from them in the first place. But don't take my word for it...do your own research.
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