Personal Bankruptcy: What You Should Know Before You File

If you're struggling to pay your debt, filing for bankruptcy might be the best thing you could do for yourself. Deciding what kind of bankruptcy protection could be a tough thing to do alone, but educating yourself about options and speaking with a professional who can guide you thorough the process can make all the difference.

How to Decide Whether Bankruptcy Is Right for You

The ramifications of filing for bankruptcy protection are harsh, so you'll want to think very carefully about what your options are before choosing that path. The American Bankruptcy Institute has a great guide to aid you in deciding whether or not you should seek bankruptcy protection. If you're faced with several of the following circumstances then you should definitely consider seeking bankruptcy protection:

• Your wages or your bank account are garnished
• A majority of your debt is unsecured, like credit card bills or hospital bills
• Your total debt is more than you can pay after five or more years
• You have little or no savings
• You cannot pay your outstanding taxes
• There are lawsuits pending against you
• You have had property repossessed or have property that is in danger of being repossessed
• You are getting calls at home or at work from collection agencies

Bankruptcy: The Process

If you finally do decide to file for bankruptcy, you'll have the option of filing under either Chapter 7 or Chapter 13 of the bankruptcy code. The minute a bankruptcy petition is filed, something called an automatic stay is enacted. During the automatic stay period creditors are barred from attempting to collect debts from you.

In both the event of a Chapter 7 or Chapter 13 filing, you'll have to file a petition and other legal documents that include the following information:

• A list of all of your creditors and how much each are owed
• Your income information: how much you earn, and how often you get paid
• All of your personal property
• A detailed list of your monthly living expenses, such as food, clothing, utilities, transportation, etc.

Your creditors will have no more than 90 days from the day a petition is filed to submit proof of their claims with the bankruptcy court administering your case.

Chapter 13: Making a Plan of Action

In Chapter 13 bankruptcy, you'll be able to retain your property and propose a repayment plan spelling out how you will repay your creditors over the course of three to five years. This plan must be filed with the court no more than 15 days after a you file for bankruptcy. If you think you'll need more time to construct a repayment plan, then you'll be able to request an extension from the court.

Next, a creditors' meeting is convened within 50 days after a bankruptcy petition is filed, where you'll be placed under oath and both the trustee and your creditors will ask you questions about your finances. From that meeting the parties can propose a plan.

While some debt is dischargeable in Chapter 13 bankruptcy, you won't be able to discharge student loans, home mortgages, taxes, fraudulent debts, alimony and child support and criminal fines.

The final step in the Chapter 13 process will involve winning approval, or confirmation, of your Chapter 13 plan from a bankruptcy judge. Garnering as much support as possible from your creditors will be a very important step, because it will ensure that the confirmation process runs as smoothly as possible. If your plan is approved, then you'll need to make sure that you follow through on your payments to your trustee, who will then provide those payments to your creditors. Until your plan is full executed, any and all new debt you incur will have to be approved by the bankruptcy trustee.

If you find you're having difficulty making payments on your plan due to unexpected circumstances you can request a hardship discharge.

Chapter 7: A Fresh Start

Unlike in a Chapter 13, a Chapter 7 bankruptcy filling essentially allows you to wipe the slate clean on your debt, which is why it's much more difficult to legally qualify for this type of bankruptcy protection. In order to qualify to file for Chapter 7 protection, you'll need to pass a 'means test'— or, a test that, based on your income, will determine whether or not you are capable of paying off your debt.

Because you'll be extinguishing most, if not all, of your debt, you'll only be allowed to retain essential property like motor vehicles, household appliances, pensions, a portion of your home equity and necessary clothing. A Chapter 7 trustee will then take possession of your nonexempt property, sell it, then distribute the proceeds from the sale to creditors.

Whether you file for Chapter 7 or Chapter 13 bankruptcy, just remember there is no shame seeking bankruptcy protection. Find a great attorney or financial professional to walk you through the process and take charge of your personal finances!