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What is Bankruptcy?


What is Bankruptcy?

Bankruptcies are basically labeled in two categories, reorganizations and liquidations.  Bankruptcy can help businesses and consumers eliminated their debt or give a debtor protection of the courts.  Bankruptcies are handled by the federal courts.

Chapter 7 bankruptcy is for liquidations.  A home owner in a state where real property is not protected by state law can be sold by the court to pay back owed debt.

Chapter 13 bankruptcy is for reorganization of consumer finances.  The consumer will be allowed to keep all his or her property but will have to make payments to the court over a 3 to 5 year period.

There are exceptions to each type of bankruptcy.  Not all debt can be covered by either type of bankruptcy and not everyone can file.

A Chapter 7 bankruptcy will take 3 to 6 months and the consumer's property can be at stake.  The upside is that even if assets are sold, the unsecured debt will typically be wiped out.  With a Chapter 7 the consumer will be allowed to keep all exempt assets such as a vehicle, clothing, furniture.

If the Consumer going through a Chapter 7 bankruptcy has secured debt, such as a car loan, the consumer can choose to pay off the vehicle in a lump sum equal to the amount of the replacement value of the vehicle.  If the lender agrees then he or she can keep paying on the note as set up in the original contract.  In some cases, even secured debt can be eliminated.

Not everyone is allowed to file for Chapter 7 bankruptcy.  If the consumer has enough disposable income to pay back the loans through Chapter 13 reorganization, then he or she will not be allowed to file for Chapter 7.

What debts can't be eliminated through bankruptcy?  Child support, back taxes, and spousal support cannot be taken out with a bankruptcy.  However, credit card debt, medical debt, and other unsecured loans can typically be discharged through the bankruptcy.

If you have a reliable, stable source of income you can apply for Chapter 13 reorganization.  In Chapter 13 the consumer has to submit a repayment plan to the court.  The plan must show how you intend to repay the debt over a 3 to 5 year period.  The minimum to pay in a Chapter 13 bankruptcy is determined by how much your creditors would have gotten in a Chapter 7 proceeding and of course how much you earn.

The limits on debt set by the federal government about a million dollars in secured debt and about 350 thousand for unsecured debt.

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