Back in the old days Chapter 7 bankruptcy was generally used as a last resort for people that were dealing with mountains of debt. Bankruptcy was originally enacted by Congress to give people a second chance and a fresh start after being in financial distress. When individuals started abusing the bankruptcy laws, in 2005 Congress made changes to the bankruptcy code making it much harder to file for Chapter 7 bankruptcy. With the current laws, individuals that would have filed Chapter 7 in the past are now forced into a Chapter 13 bankruptcy. Previously, people who would abuse the bankruptcy system would run up their credit card debt and file chapter 7 to wipe it out allowing them just to do it over again. Many of these individuals have a consistent substantial income and could have paid their debts back over time. Because of these individuals, creditors lobbied Congress to change the bankruptcy laws.
With the new laws in effect, there are more requirements for the debtor to qualify for bankruptcy. The two main chapters for personal bankruptcy are still available, Chapter 7 and Chapter 13. Chapter 7 is also known as a straight bankruptcy, that will wipe out all unsecured debts while allowing the court to liquidate any unprotected assets to pay back the creditors. On the other hand, Chapter 13 is known as a wage earner bankruptcy. This is because the court negotiates to reorganize the debt by setting up a 3 to 5 year repayment plan. There are still many common bonds between the two types of bankruptcy, most importantly, the Automatic Stay. Also, nowadays when filing bankruptcy under any chapter, all debtors are required by the court to take a pre-filing credit counseling course and a post filing financial management course.
If the debtor is put in a Chapter 13 bankruptcy they are required to maintain a household budget during the 3 to 5 year repayment plan. Some people decide that Chapter 13 bankruptcy would work best for their situation to protect assets. While filing a Chapter 13, the court will appoint a trustee to monitor the finances of the debtor as they relate to the bankruptcy case. The court requires those filing to be responsible following a plan to get out of debt in no more than five years. For many, this makes Chapter 7 sound like a jewel. At first glance, Chapter 7 sounds like a no-brainer if you qualify. Although, everything is not always as good as it seems.
With all the good, there is always a downside too. One question that gets frequently asked to bankruptcy attorneys is, What won’t personal bankruptcy do? Filing for bankruptcy is not necessarily a cure-all to your debt problems. Many people think that if they file bankruptcy, they can wipe out the debt and keep the stuff. This is not true. The rule of thumb to use is, if you didn’t pay for it you can’t keep it. Even in a bankruptcy, debts that are secured are not eliminated. In most cases lenders will require a reaffirmation agreement for property that you want to keep. This agreement will restate that you will continue to make the payments to keep that property. Examples of secured property are, real estate, automobiles, and in some cases furniture. Another downside to filing for bankruptcy is, it will now stay on your credit report for 7 years for Chapter 13 and 10 years for Chapter 7. Personal bankruptcy is not always the right choice for everyone. If bankruptcy is used for what it was created, it can be a powerful tool for those drowning in debt.