Bankruptcy 411
|
|
Foreclosures and excessive debts are a homeowner’s worst nightmares come true. Many believe bankruptcy to be the perfect solution for these problems. But, that’s where people get trapped. Bankruptcy stays on your credit record for quite a long time, making advancing in life incredibly difficult. In addition, the updated bankruptcy law, passed in 2005, includes severe restrictions that make it more complicated to file for bankruptcy. When faced with foreclosure or any such financial insolvency, the final option in this situation should be bankruptcy. Declaring yourself bankrupt is the only legal way to get rid of your financial setbacks. However, the process of filing for bankruptcy is easier said than done. (To nip foreclosure in the bud, read “Saving Your Home From Foreclosure” and “Are You Living Too Close To The Edge?”) When you file for bankruptcy, you have to explain to the presiding bankruptcy trustee or judge about how you got into this financial rut. In the meantime, the bankruptcy court will ask you to file the entire list of assets and outstanding debts with them. Your assets are divided into two categories according to their nature: Exempt assets, which cannot be realized to pay the debts (such as some part of equity in your home and automobile or personal items), and nonexempt assets, which can be seized and sold to repay outstanding accounts. Home property other than the primary residence, recreational vehicles, boats, etc. fall under this category. Likewise, your outstanding debts are classified into two types: Secured debts, which include loans in which the creditor has security interest in the property provided as collateral. The property bought with credit may be your second home, a boat or a car, and non-secured debts, which are not secured by property. For example, credit card debt, medical bills, personal unsecured loans, etc. The bankruptcy court considers secured debt as critically important because its nonpayment will compel the creditor to lay claim on the property chosen as collateral. Once all the essential information has been filed with the court, a bankruptcy trustee is designated to make sure that your secured debt is repaid in the given period. Consequently, the court issues a mandatory “stay” that prevents your creditors from laying their hands on you through property confiscation or foreclosure. The stay also prevents the creditors from pursuing a lawsuit against you. (For more on protecting your assets, read “Bankruptcy Protection For Your Accounts.”) Depending on your circumstances, you can choose to file Chapter 7 or Chapter 13 under the bankruptcy law. Chapter 7 This liquidation option enables you to keep the exempted assets, whereas unsecured debts from credit cards, etc. are discharged. Here, the nonexempt assets are realized to repay the secured debts. However, debts of student loans, child support, taxes, etc. will not be dismissed. This alternative is generally chosen by individuals with lower income and few assets, and more debts. Chapter 13 Under this reorganization proceeding, you have to repay your debts over the specified period of three to five years through a logical repayment plan. The trustee collects the payments from you and transfers them to your creditors. Here again, you are permitted to keep your home, thereby preventing any looming foreclosure. This bankruptcy option is normally preferred by individuals who are interested in keeping their nonexempt property intact or who want to buy time against foreclosures or property seizures. (Don’t lose your home–use your home! To learn more, see “Downsize Your Home To Downsize Expenses” and “Fix It And Flip It: The Value of Remodeling.”) |