Bankruptcy is a legal proceeding that helps some people who cannot pay their bills get a fresh financial start by temporarily, or permanently, preventing creditors from collecting debts from you. Bankruptcy is generally considered the debt management tool of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, making it difficult to acquire credit, buy a home, get life insurance, or sometimes get a job.

However, it is a legal procedure that offers a fresh start for people who can no longer satisfy their debts. Individuals who follow the bankruptcy rules receive a discharge: a court order that says they do not have to repay certain debts.

What Can Filing for Bankruptcy Do for Me?

Filing for bankruptcy may help you eliminate the legal obligation to pay most or all of your debts; stop foreclosure on your house or mobile home and give you a chance to catch up on missed payments; prevent repossession of a car or other property (or sometimes force the creditor to return property even after it has been repossessed); stop garnishment, debt collection letters, and other creditor actions to collect a debt; and restore or prevent termination of utility service.

What Can Bankruptcy Not Do?

Bankruptcy cannot cure every financial problem. For example, it usually will not eliminate debts owed to “secured” creditors (i.e., creditors who hold an interest in collateral, such as a mortgage or a car note), though it may allow for a restructuring of that debt. It also will not discharge debts that fall into the following categories: some debts incurred within 180 days prior to filing bankruptcy; child support; alimony; court fines and penalties; some taxes, especially those accrued over the past three years; debts not listed on your bankruptcy petition; loans obtained through fraud; student loans owed to a school or government body which became due less than 7 years before the bankruptcy was filed, unless payment would be an undue hardship; debts that arise after bankruptcy has been filed; or protect co-signers on your debts (when the primary debtor on a co-signed loan discharges the loan in bankruptcy, the co-signers may still have to repay all or part of the loan).

How Much Debt Do I Have To Have Before Filing For Bankruptcy?

Some experts suggest that you should not file for bankruptcy unless you have at least $15,000 to $20,000 in debt. In theory, you can file with less debt, but the damage to your credit rating may outweigh the benefit of discharging a smaller debt load and it may be more difficult to persuade the court that a discharge is warranted.

Are There Different Types Of Bankruptcies?

There are two common kinds of bankruptcies for individuals: Chapter 7 and Chapter 13.

In Chapter 7, debts are discharged, usually by forfeiting property to the bankruptcy trustee to attempt to satisfy the outstanding debts. Debtors are allowed to keep a certain amount of property, called “exemptions.” Exempt property cannot be seized during the bankruptcy procedure.

The big drawback to Chapter 7 is that property subject to a security interest, like a home or a car, is not exempt and can almost always be seized to satisfy the indebtedness related to that particular item. So if you can afford to make payments on items subject to a security interest and still want to keep them, even though you are behind on your payments, then Chapter 7 is probably not the best choice because it does not prevent secured creditors from taking your property to satisfy your debt.

Chapter 13 “reorganization” is a special kind of repayment or debt adjustment plan. In Chapter 13 bankruptcy you file a repayment plan in court showing how you will pay off your debts over the next three to five years. The big benefit to Chapter 13 is that it prevents your creditors from harassing you and allows you to keep property subject to a security interest, as long as you make the payments required under your repayment plan. In most cases, these payments must be at least as much as the monthly payments required by the contract establishing the original debt, plus whatever extra amount is required to get caught up. Chapter 13 may be the best choice for you, if you are behind on debt payments but can catch up given enough time.

Of course, for most people in this situation it is usually possible to work out a payment plan directly with the creditors rather than ever filing bankruptcy. It is much more advisable to handle things that way, if possible, because you save your court and attorney fees for filing the bankruptcy and do less damage to your credit.

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Brian D. Zinn is a Fort Myers bankruptcy attorney who services clients in Fort Myers, Estero, Cape Coral, Bonita Springs, Naples, FL. His main areas of practice are contract law, construction law, litigation and bankruptcy law.

At Zinn Law, our goal is to provide each of our clients with legal assistance that is accurate, personalized, courteous, and cost-effective.

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