If you are struggling with a mountain of credit card bills, filing for bankruptcy can be a good solution. It offers a fresh start for people who can't fulfill their financial obligations. Federal law contains several Chapters governing different types of bankruptcy proceedings. A consumer can go through bankruptcy under either Chapter 7 or Chapter 13. Most people choose the first variant. Chapter 7 liquidates your debts, but you may have to let the bankruptcy court sell some of your property for the benefit of your creditors. Read more about Chapter 7 bankruptcy in our article.
Chapter 7 bankruptcy can be a good remedy for your debt problems, but it is not available to everyone. You must pass a "means test" to get approved. If your income is sufficient to pay some or all of your debts in the five year time frame provided by Chapter 13, or if you have already declared bankruptcy in the past 6-8 years, you won't be able to use it.
The whole Chapter 7 bankruptcy process takes about four to six months. You need to fill out a two-page petition and a number of other documents that ask you to describe your property, current income, debts and monthly living expenses.
When you filed the bankruptcy petition, federal law imposes an "automatic stay" that stops most collection actions against you or your property. At least for some time your creditors may not initiate or continue lawsuits, empty your bank account or go after your vehicle or house.
Several weeks later, you and all the creditors that you listed in your bankruptcy documents will receive a notice about "creditors meeting." The trustee and the creditors may ask you different questions about your bankruptcy and the papers you filed. Typically, most creditors will not present, although some companies attend these meetings.
By declaring Chapter 7 bankruptcy, you are placing your property in the hands of the bankruptcy court. If the trustee determines that you have some non-exempt property, he or she can sell it to pay off your debts.
Each state has laws that determine which items of property are exempt in bankruptcy, and which are not. Exempt items cannot be sold. Most states let you keep health aids, household furniture, apparel and "personal effects" - things like electric shavers, toothbrushes and hair dryers. Some property can be exempt to a limit. For example, a car is exempt to several thousand dollars.
If don't owe much, chances are good that you will be able to keep all your property (if it is not collateral for a secured debt). Most Chapter 7 cases are "no-asset": it means that people do not have any non-exempt property for the trustee to sell.
After all those procedures, nearly all of your debts will be wiped off by the court - credit cards, most personal loans, medical bills, judgments resulting from car accidents and deficiencies on repossessed vehicles. The exceptions are spousal or child support obligations, most tax debts, fines and penalties imposed for violating the law and debts that the court has declared non-dischargeable because the creditor objected. Student loans will not be wiped off unless you can prove that repaying the debt would be an undue burden.
The information about bankruptcy will stay on your credit report for up to 10 years. You will need to work hard to get your credit score back up. It can take several years before you will be able to qualify for low rate credit cards or loans.
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