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July 13, 2024

What is Bankruptcy? Bankruptcy is the filing of a petition with the federal bankruptcy court where you are attempting to obtain protection from the collection efforts of creditors. People normally file bankruptcy when their debt outweighs their current income and assets. At the end of the bankruptcy proceeding, some or all of the individual’s debt will be canceled. There are two different options: Chapter 7 and Chapter 13. Chapter 7, used by approximately 70% of all consumers, is faster to complete and essentially “wipes the slate clean”. The Chapter 13 plan offers an alternative if the debtor has a steady income, a steady job and wants to attempt to pay off all of his or her debts.

Chapter 7 bankruptcy refers to the chapter of the federal statutes (the Bankruptcy Code) that contains the bankruptcy law. Chapter 7 bankruptcy is sometimes called "straight" bankruptcy. This bankruptcy cancels most of your debts; in exchange, you might have to surrender some of your property.

The Chapter 7 bankruptcy process takes about four to six months and involves costs of approximately $200 in filing and administrative fees, and usually requires one trip to the courthouse for proceedings.

Filing for bankruptcy puts into effect the "automatic stay." The automatic stay immediately stops your creditors from attempting to collect any money that you owe them. Therefore, creditors cannot legally garnish your wages, draw from your bank account, seize your car, house or other property, or cut off your utility service or welfare benefits.

Until your bankruptcy case ends, your financial problems are in the hands of the bankruptcy court. It assumes legal control of the property you own (except your exempt property, which is yours to keep) and the debts you owe as of the date you file. Nothing can be sold or paid without the court's consent. You have control, however, with a few exceptions, of property and income you acquire after you file for bankruptcy.

The court exercises its control through a court-appointed person called a "bankruptcy trustee." The trustee is primarily interested in what you own and what property you claim as exempt. This is done because the trustee's primary duty is to see that your creditors are paid as much as possible on what you owe them. And the more assets the trustee recovers for creditors, the more the trustee is paid.

The trustee goes through the papers you file and asks you questions at a short hearing, called the "creditors' meeting," which you must attend. This meeting is not likely to last more than five minutes. Creditors may also attend, but rarely do.

After this meeting, the trustee collects the property that can be taken from you (your nonexempt property) to be sold to pay your creditors. You can surrender the property to the trustee, pay the trustee its fair market value or, if the trustee agrees, swap some exempt property of equal value for the nonexempt property. If the property isn't worth very much or would be cumbersome for the trustee to sell, the trustee can "abandon" the property-which means that you get to keep it. Very few people actually lose property in bankruptcy.

If you've pledged property as collateral for a loan, the loan is called a secured debt. The most common examples of collateral are houses and motor vehicles. In most cases, you'll either have to surrender the collateral to the creditor or make arrangements to pay for it during or after bankruptcy. If a creditor has recorded a lien against your property, that debt is also secured. You may be able to wipe out the lien in bankruptcy.

If, after you file for bankruptcy, you change your mind, you can ask the court to dismiss your case. As a general rule, a court will dismiss a Chapter 7 bankruptcy case as long as the dismissal won't harm the creditors. Usually, you can file again if you want to, although you may have to wait 180 days.

At the end of the bankruptcy process, most of your debts are wiped out (discharged) by the court. You no longer legally owe your creditors. You can't file for Chapter 7 bankruptcy again for another six years from the date of your filing.



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