Personal Bankruptcy

You want to get out of debt, but you're not sure which option is right for you.  Should you speak to a credit counselor, get a debt consolidation loan, have your debts settled for less, or just file bankruptcy?  Well, this page is dedicated to explaining what personal bankruptcy is and how filing can get you out of debt.  Bankruptcy should be your last resort to getting out of debt.  If you've tried the other alternatives and you have no wealthy relative to ask for help, then you should probably consider bankruptcy.

Before You File Your Personal Bankruptcy Papers...

• Exhaust all other avenues of debt restructuring, negotiation, or settlement. 
• Realize that the next 7-10 years will be tough, but not impossible to rebuild your credit.
• Know your existing state laws about what items are exempt¹
• Find out which debts you owe will not be "discharged" (tax liens, alimony, preference items student loans, etc.)
• Transfer any cash from lenders to whom you owe debts (they could hold your funds to offset the debt before it's discharged).
• Do NOT use your 401k to pay off debt that you were going to have discharged...you could end up owing the government taxes (which are not dischargeable)
• Seek legal advice about how to convert non exempt property into exempt property
• A co-signor on any debt that you owe will become completely liable for the debt
• The process takes 3 months - 5 years depending upon the type filed 

¹Exempt property is basic assets deemed necessary for the debtor's "fresh start" after bankruptcy.

What Is A Federal Bankruptcy Exemption?

Federal bankruptcy law allows you to protect some property from the claims of creditors either because it is exempt under federal bankruptcy law or because it is exempt under the laws of your home state.  Many states have taken advantage of a provision in the bankruptcy law that permits each state to adopt its own exemption law in place of the federal exemptions.

In other jurisdictions, you have the option of choosing between a federal package of exemptions or exemptions available under state law. Thus, whether certain property is exempt and may be kept by you is often a question of state law.

What Bankruptcy Exemptions Apply to Me?

Typically, your house and car up to certain dollar limits are exempt property, but to find out for sure which exemptions apply to you, then please select your state from the table below. If you live in one of the following states, then you may choose either your state or the federal bankruptcy exemptions :

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 Federal Exemption Table

New Bankruptcy Laws: Good News for You?

In April of 2005, President Bush signed into law a bankruptcy reform bill that  effectively makes it more difficult for anyone to file Chapter 7 bankruptcy.  The lawmakers who supported the bill saw it as a deterrent to those abusing the current laws.  However, they were not considering those who really needed to file--those affected by recent job loss, divorce, medical bills, or other life altering events.  

A Chapter 7 bankruptcy liquidates all of your assets (except those exempt under your state law) to pay off your creditors.  Any debts not covered go unpaid and are written off by the creditor. 

A Chapter 13 bankruptcy is a reorganization of your bills.  You are allowed five years to pay back your creditors under this plan interest-free.  Any debts not addressed in the repayment plan go unpaid and are again, written off by the creditor. 

First, your income is now subject to a "means" test. The means test determines whether (a) you can afford to pay 25 percent of your non-priority unsecured debt such as your credit card bills before taking into account your living expenses, and (b) you are above or below your state's median income level.

If your income is above your state's median income level and you can afford the 25 percent payment, then you may be allowed to file Chapter 13.  If your income is below the median, then you may be able to file Chapter 7; however that is at the court's discretion.  You could still be forced into filing Chapter 13. 

Second, if you do not qualify for Chapter 7 or you wish to file under Chapter 13, a repayment plan must be calculated and determined.  Under the new law, the IRS' standard of living guideline is used to determine what is a reasonable amount for you to pay for rent, food, etc. You can contest their calculation, but it will cost you time and money to see a judge.

The current law allows the court to determine if you can file Chapter 7 and with your input decides how much your repayment plan is under Chapter 13.  There is no "means" test to qualify under.

Third, if you haven't lived in a state for at least two years, you may only take the state exemption of the state where you lived for the majority of the time for the 180 days before the two-year period.

Finally, you must meet with a credit counselor in the six months prior to applying for bankruptcy. And before debts are discharged, you must attend money management classes at your expenses.

This page is a summary of the key changes affecting you under the new bankruptcy laws, as well as a resource for exemptions by state.  All changes under the new law have not been listed here.  If you are looking for more detailed information about the new bankruptcy laws, or you are wondering if you should file bankruptcy, then we recommend the following website: http://www.Factsaboutbankruptcy.com