Personal bankruptcy can be a lifesaving financial solution for consumers who are “drowning” in debt. Credit cards, medical bills, mortgage payments, student loans, all of it, are dead weights. The more debt you have, the heavier those weights get. And the heavier they get, the deeper they pull you under.
WHAT IS PERSONAL BANKRUPTCY?
Personal bankruptcy acts like your teammate in the water. It’s not a lifeguard; it can’t rush in and carry you to safety like some hero. But it can pull some of the weight off your shoulders for you. Then, combined with your own efforts, the remaining weights can be lifted off your shoulders completely so you can surface and finally catch some air.
That’s what bankruptcy can do for you if your excessive debts are pulling you under. Not everyone qualifies for bankruptcy, and there are other solutions to consider, but bankruptcy is a realistic and constructive possibility, and it’s worth a closer look.
HOW DOES IT WORK?
Bankruptcy begins when you file a petition with the United States Bankruptcy Court. With that petition, you’re essentially asking the court to help you get legal relief from your debts. You’re either asking them to ‘reorganize’ your debts or ‘eliminate’ your debts. Reorganizing your debts means that you would negotiate lower interest rates or loan amounts you’re your lenders. Eliminating your debts, on the other hand, would entail just that; the courts would eradicate qualifying debts. (More details on that below.)
Once they receive your petition, the court immediately orders your creditors to freeze all penalties and to cease any legal action against you for past-due payments or overdue debts. This order stays in effect while the Court reviews and processes your petition. This usually takes anywhere from 4-6 months, sometimes longer, for more complicated filings.
If the bankruptcy is approved, your qualifying debts will be reorganized or discharged, depending on which type of bankruptcy you petitioned for.
3 MOST COMMON FORMS OF PERSONAL BANKRUPTCY
The three most common forms of personal bankruptcy are chapter 7, chapter 13, and medical. Here, we’ll summarize all three.
Chapter 13
Individuals with a reliable source of income can file for Chapter 13 bankruptcy.
Chapter 13 bankruptcy is a team effort between you, the Court, and your creditors. The goal is to come up with a realistic payment plan to pay off your creditors.
Payment plans typically last anywhere from three to five years and are based on:
- Your income,
- The amount of debt you owe, and
- How much your unsecured creditors would have received if you had filed for bankruptcy under Chapter 7.
To qualify for Chapter 13, you have to meet several basic requirements. Overall, you have to prove that you can create a realistic payment plan and sustain an income steady and high enough to complete the payments. Understanding the complex paperwork, deadlines, and legalities, though, can get complicated, so we urge you to discuss it with our dedicated bankruptcy team.
While chapter 13 does have some strict eligibility requirements, it also comes with several advantages. For example, chapter 13 usually allows you to repay your secured debts, even if you’re behind on the payments, without having the property that secures the debt repossessed or foreclosed on. In other words, you may get to keep your car or house. You may even be able to lump your past due payments in with your payment plan, and pay them off over a period of years. The point is, there are options.
With most types of bankruptcy, there are exceptions, too. Debt’s that can’t be wiped out may include;
- Child support
- Most taxes, federal and state
- Spousal support, and
- Student loans
Chapter 7
Both individuals and businesses are allowed to file for bankruptcy under Chapter 7. With a Chapter 7 proceeding, some of your property may be seized and sold in order to pay off some or all of your debts. However, as a general rule, most unsecured debts (debts that are not secured by collateral, like credit cards) will be wiped out completely.
There are certain types of properties that cannot be sold to pay off your debts. In fact, many people who file for Chapter 7 bankruptcy are pleased to discover that they’re actually able to keep more of their property than they expected.
Just like chapter 13, chapter 7 has its own set of basic eligibility requirements. One important requirement is that a petitioner cannot make enough money, minus certain expenses, to be able to fund a Chapter 13 plan. In other words, chapter 13 is usually preferred by the court’s and creditors because it allows the creditor’s to collect more of the debt they’re owed.
There are also a number of debts that cannot be wiped out in a chapter 7 bankruptcy. These are identical to the chapter 13 exclusions and include;
- Child support
- Most taxes, federal and state
- Spousal support, and
- Student loans
Many consumers struggle to differentiate between chapter 7 and chapter 13 bankruptcies. The lines aren’t always clear and it can genuinely be a challenge to figure out how to get started or what to file and when. Our bankruptcy experts can help take the guesswork and stress out of the bankruptcy process. We can help you file the correct paperwork, re-negotiate debts on your behalf, and work to get the most fitting bankruptcy discharge for your financial situation.
Medical Bankruptcy
There isn’t actually a separate form of bankruptcy established just for medical debts.
Medical bills are typically unsecured; meaning you don’t put up any collateral before you can see a doctor or check into the hospital. Unsecured debts are usually some of the first to be eliminated or reorganized during a bankruptcy proceeding. That means you can file bankruptcy even if your only troubling debt is outstanding or outrageous medical bills.
You can be assured that you’re not alone. Millions of Americans have filed for Chapter 13 or Chapter 7 bankruptcy solely for the purpose of eliminating medical expenses that quickly got out of control because of today’s rising healthcare costs.
As with any consumer considering bankruptcy, please seek experienced counsel from a consumer advocate who can help you to understand your options and choose the right path for you.
