Bankruptcy Basics

By Heather Faucher | Posted on September 16, 2009 | Filed Under Bankruptcy 

bankruptcypic5Bankruptcy was created to benefit both debtors (consumers or businesses who owe money to others) and their creditors (a person or business who is owed money) by making sure that debtors get relief from debts that they truly can’t afford to pay, as well as ensuring that creditors get paid from any assets that the creditor doesn’t need to live on. In 2005, the U.S. Bankruptcy Code was modified to make it more difficult for debtors who can afford to pay off at least some of their debts to file for Chapter 7 bankruptcy, which forgives most if not all of a consumer’s debt. Instead, most of these debtors are required to file for Chapter 13 bankruptcy, under which they re-pay most or all of their debts under a 3 to 5 year payment plan.

So, how do you know whether you’ll need to file for Chapter 7 bankruptcy or Chapter 13? Easy enough–you need to take something called the means test. This is a formula that was established in 2005 that determines whether or not a debtor has enough money–after deducting basic costs of living–to make payments of a minimal amount on his or her debt. Those who do not have enough money left after paying their basic expenses will most likely qualify for Chapter 7 bankruptcy. A Court-appointed Trustee will oversee the liquidation of the debtor’s non-exempt assets and re-pay as many creditors as possible.

During the bankruptcy process, a debtor files a Bankruptcy Petition with the United States Bankruptcy Court. In certain circumstances, creditors can force a debtor to file for bankruptcy, though involuntary bankruptcies are exceedingly rare. The goal of the bankruptcy process, from a debtor’s point of view, is to achieve what is called a discharge, or the forgiveness of debt. A discharge is a permanent order which forbids creditors from making any more collection attempts on any debt that was disclosed during the bankruptcy proceedings. This means that creditors can no longer call, write, or make any other kind of personal contact demanding that the debtor pay debts which have been discharged.

Sometimes, silence truly can be golden!

Thinking about filing bankruptcy? Find more information here.

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The opinions and information on this blog are not intended as legal advice. They are for informational and entertainment purposes only, and should not be construed as legal advice on any subject matter. Click here for the full disclaimer.