What is Bankruptcy?

The Big Picture

Bankruptcy has pros and cons. Know what you are getting into before you sign up for bankruptcy.

What Is Bankruptcy?*
Bankruptcy helps debtors get relief from debts they can't pay and creditors get satisfaction from assets the debtor can give up and still survive. Bankruptcy is governed by the federal law found in Title 11 of the United States Bankruptcy Code.

Bankruptcy is a legal procedure that serves as a "last resort" for people who cannot pay their bills. A decision to file for bankruptcy is a serious step. You'll have to give up everything that isn't a necessity, and use the money to pay off your creditors. Creditors are given priority by a court. Once your assets are distributed, you will be free from most of your obligations, even if your debts are not all paid off.

*The material presented here is adapted from the Making Change series by the Foundation for Human Development, Inc., 2003

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Are You a Good Candidate for Bankruptcy?

The Big Picture

A rule of thumb to know if you should declare bankruptcy. When bankruptcy can help and when it's a mistake.

There are four kinds, or chapters, of bankruptcy. Find out the difference and how much each one will cost you.

You can't lose everything you own in bankruptcy. Protect what you can.

The paperwork of bankruptcy isn't easy; how to know if you need a lawyer to handle yours.

How long does the process take and when you are through the other side, what can you expect? Is there life after bankruptcy? Yes, but it's easier if you stay out of credit trouble.

Bankruptcy is a last resort. Explore non-bankruptcy alternatives first. It's easier if you create a budget for your realistic, monthly expenditures for current living than if a court does.

Bankruptcy Rule of Thumb
If the money available each month after you pay your current living expenses is enough to pay off your existing debts in three years, you can get along without bankruptcy. If not, look for ways to reduce expenses, increase income or sell assets to make that possible before choosing bankruptcy. If you can't pay off your debt within three years on the present terms, try a credit counselor. They can help you make a budget and negotiate a repayment plan that may include a reduced interest rate on your existing debt.

When Bankruptcy Has A Chance To Help
There is no magic formula for determining whether bankruptcy is the best choice for you. Consider these factors that might make bankruptcy a good choice:

However, if you have nothing that a creditor could take from you (that is, nothing that could be repossessed), there is no reason to seek bankruptcy protection now.

Bankruptcy Costs
Bankruptcy court filing fees are standard nationwide. The filing fee for a Chapter 7 bankruptcy is $299. The filing fee for a Chapter 13 bankruptcy is $274. A $25 fee applies if you convert from a Chapter 13 bankruptcy to a Chapter 7 bankruptcy. Finally, a $26 amendment fee applies for every change you make after the initial filing. Attorneys' fees vary depending on location and complexity.

In a Chapter 13 bankruptcy, debtors usually pay a portion of the attorney's fees and the entire filing fee before filing. The balance of the fees becomes part of the discharged debt and is paid from the monthly payments that the debtor makes to the trustee.

If you are deep enough in debt to consider bankruptcy, you probably don't have the cash on hand to file for bankruptcy. If you are considering stopping credit payments and saving the payments so you can file for bankruptcy, weigh the consequences. If you stop payments, a creditor can take action against you, but it usually takes weeks or months for a creditor to get a judgment that permits them to seize your property or your wages. Most creditors rely on letters and phone calls for a long while before suing. This gives you time to save money to pay for bankruptcy.

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