Bankruptcy is a federal court proceeding that will help eliminate or payback debt.  It is a legally declared or recognized condition of insolvency.  Bankruptcy can be utilized by individuals, married couples or businesses unable to pay their debts.

 

For most people, even the thought of filing bankruptcy (BK) can be an overwhelming experience. The biggest deterrent for the majority of clients is the perceived amount of time, and paperwork that goes into the BK legal process.  On top of this, there are the complicated laws, courts and attorney’s to deal with when claiming bankruptcy in the United States.  We understand the amount of stress you’re under, and Total Debt Network is here to tell you it doesn’t have to be as hard and complicated as some lawyers make it out to be.  Whether you’re drowning in a sea of collection letters and debt collection calls, or just tired of barely scraping by week in and week out due to never ending high interest debts; there is a way to break free.

 

Filing for bankruptcy usually requires the following steps…

• Undergoing a “means” test.
• Receiving debt counseling from an approved organization.
• Submitting a repayment plan.
• Attending a meeting with creditors.

 

About Bankruptcy: What is bankruptcy and how to file

There are 4 forms of bankruptcy but the two most commonly used forms are Chapter 7 and Chapter 13.

 

Chapter 7

Chapter 7 BK is the most commonly used form of bankruptcy and is often times referred as a “Straight BK”. Chapter 7 is knows as a liquidation proceeding, meaning the debtor turns over any/all non-exempt (see below for explanation) property to the BK trustee. The trustee then sells the items and distributes the funds to creditors.  This will stop the harassment of creditor’s calls and put you on the track to a new financial future.

Chapter 7 allows the client the ability to keep some possessions called “Exempt Items.” An exempt item is an item that is not accounted for in the bankruptcy proceedings. While exempt items vary from state to state, generally in Chapter 7 exempt items are the same regardless of the residing state.

These exempt items typically include:

  • The primary residence
  • One vehicle
  • Personal items
  • Retirement savings in pension funds
  • 401Ks
  • IRAs

Individuals will only be allowed to keep their primary home and vehicle if they can afford those payments after completing the Chapter 7 bankruptcy proceedings.

The process generally takes 4-6 months from the filing date to the final discharge. Chapter 7 is the best option for people who have few or no assets, little to no income, and a great deal of debt. This is the simplest and quickest form of BK and can only be filed once every 6 years, but stays on your credit score for 10 years.

 

Qualifying for Chapter 7

In 2005 Congress added into the bankruptcy law something called the “means test”. The “means test” must be passed in order for an individual to claim Chp 7.  The test is a fairly simple 2 step process.

      1. First thing that’s examined is the household income in direct comparison to the state median income (based on family size). The past 6 months are looked at to determine your annual income. If your income is less than your state’s median income, you’ve passed the test and can proceed with filing Ch. 7.
      2. If your income exceeds the state median, it gets a bit more complicated. Disposable income is now calculated to determine if you can afford to make monthly payments towards outstanding debts and pay them off in 5 years.

 

Do not let the Chapter 7 means test intimidate you, nearly 50% of people attempting to file Ch. 7 “pass” the means test at step 1.  Those above the median line have certain allocations available around disposable income to meet step 2.  For those who don’t qualify for Chapter 7, Chapter 13 or an alternative Debt Relief program is also an option.

 

What to Expect following Filing Ch. 7 BK:

The  end result of claiming Ch. 7 BK is to create a clean slate and a fresh start, free from debt.  However, certain debts survive a Chapter 7 bankruptcy because they are exceptions from the discharge by law.  The most common exceptions are as follows.

      • Child support
      • Income taxes less than 3 years old
      • Property taxes
      • Fines and restitution imposed by the court
      • Student loans

 

Chapter 13

Chapter 13 Bankruptcy has become a bit more common in the last few years as a result of the means test put in place for a Ch. 7 BK.  Also classified as a reorganization bankruptcy, Ch. 13 BK requires no property to be exchanged for ones debts, like Ch. 7. Filing Ch. 13 is based off ones income, since the debt isn’t being “wiped clean”, instead you will arrange to pay monthly payments to your debtors for an average of 3-5 years until the debt(s) are satisfied.  Since the amount you have to pay back is not calculated on the actual debt you owe, but instead the money you have now i.e. your income.  This means the payments to the creditors will be made on the money you have left over after paying rent, car loans, utilities and other necessities.  Once the plan payments have been calculated a trustee will be appointed to oversee the payments and ensure they are being made. The majority of the time, the amount actually paid back is much lower than what’s actually owed.

 

If you have found yourself falling far behind on your mortgage or car payments, you can file Ch. 13 and it allows you to reschedule and extend certain secured debts for the length of the repayment plan. This is the single biggest reason for filing Ch. 13, however it will stay on your credit score for 7 years unlike other debt relief programs that may help you restore credit faster.

 

Differentiating between 3 Types of Debts:

      1. Priority Debts
      2. Secured Debts
      3. Unsecured Non-Priority Debts

 

Priority Debts:

Priority Debts are considered to be more important than other debts and are generally first in line to be paid back during the repayment period.  Child support, student loans, court ordered restitution, spousal support, and certain taxes are categorized as Priority Debts.  Again, these debts must be paid in full in order for the court to discharge them.

Secured Debts:

A secured debt is just that, a debt that is secured by some sort of collateral.  Jewelry, real estate, vehicles, furniture, etc. are some basic examples of secured debt.  These debts must be paid up to at least the value of the collateral.  In some rare cases, the full debt must be satisfied, but this is obviously a case by case situation.  In Ch. 13 BK, sometimes you can get the 2nd and/or 3rd mortgage eliminated as well; this depends on your home value compared to how much is owed.

Unsecured Non-Priority Debts:

Credit cards are the largest unsecured debt in America representing $777 billion as of May 2011.  The average credit card debt per household is nearly $15,000.  Medical bills, any personal loans, and some taxes 3+ years old round out the rest of the unsecured debt category. Typically in a Chapter 13 proceeding, a small percentage of the total debt is actually paid back for unsecured debts.

“The plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected ‘disposable income’ over an ‘applicable commitment period,’ and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor’s assets were liquidated under Chapter 7…” -The Administrative Office of United States Courts.

 

Eligibility for Chapter 13

To be eligible to file Ch. 13 BK, your income must be high enough (based off your state’s median) and you must have “regular” income. If you fail to meet these requirements, you may not be able to make the payments you’ve set up on your repayment schedule and you won’t be eligible to file Ch.13.

 

Chapter 7 vs. Chapter 13

 

Bankruptcy Comparison

 

Emergency Bankruptcy Filings

Sometimes a person needs to file bankruptcy right away to stop a foreclosure, repossession, eviction, execution sale, tax levy, or utility shut-off. The bankruptcy rules allow the debtor to initiate a bankruptcy case by filing only the three page petition.

 

Mandatory Credit Counseling

Whether you’re considering filing Chapter 7 or Chapter 13, you are required to attend a credit counseling course. This is mandatory. This course can be done online, or in person with a government approved credit counselor.  Failure to complete this course will result in debts not being discharged.

 

If you would like to speak with one of our specialists about enrolling in a particular program, or just need some help deciding which solution is right for you, feel free to call us at (877) 905-7965 or complete the form on our CONTACT page.