The federal courts have a process known as bankruptcy which is designed to help individuals and businesses clear their debts and manage repayments under the protection of a bankruptcy court.
The two most common forms of consumer bankruptcy are reorganization or Chapter 13 and liquidation also known as chapter 7...
Reorganization or chapter 13 The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income.
Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.
This is a method in which you communicate to the court how much you intend to pay your creditors to clear your debts.
Normally this is part of a 3-5 year plan.
If maintained successfully, you can be freed of your debts completed.
Chapter 7 The chapter of the Bankruptcy Code providing for liquidation, the sale of a debtor's nonexempt property and the distribution of the proceeds to creditors.
in a chapter 7 bankruptcy you are able to keep property that is classified as exempt.
Exemptions vary by state and are classified as Certain property owned by an individual debtor that the Bankruptcy Code or applicable state law permits the debtor to keep from unsecured creditors.
For example, in some states the debtor may be able to exempt all or a portion of the equity in the debtor's primary residence homestead exemption, or some or all "tools of the trade" used by the debtor to make a living i.
e.
, auto tools for an auto mechanic or dental tools for a dentist.
The availability and amount of property the debtor may exempt depends on the state the debtor lives in.
Liquidation or chapter 7 usually only lasts four-to-six months, and you may only need to attend court once.
Chapter 7 is the form of bankruptcy that most people prefer.
This is because the court will normally allow you to keep some amount of your possessions -exempt properties- so that you are not destitute after the proceedings.
That sort of legal flexibility allows a person to begin their "financial life" over without depriving them of everything.
Plus it provides back to creditors at least some amount previously owed.
Liquidation or chapter 7 is not an option for everyone.
If you have used bankruptcy in the past six-to-eight years, you may not be eligible.
Also if after consideration of your debts, income, and expenditures it is determined that you are able to pay off your debts under a chapter 13 then you may not be allowed to file a chapter 7 and another form of bankruptcy may be more applicable to your situation.
If you do intend to file for bankruptcy, you will also be required to undergo credit counseling through a recognized and approved agency.
During this process, you will be encouraged to look closely at your finances and make an informed decision whether you really do need to file bankruptcy at all.
By doing this, you can better determine if you have missed any viable options for arranging agreements with your creditors and potentially avoiding the more drastic step of bankruptcy altogether.
Whatever the outcome, you will still need to complete post-bankruptcy counseling.
The purpose is to ensure you do not allow your finances to become unmanageable in the future.