About BankruptcyPosted on September 10th, 2010 William No comments
Bankruptcy is one of those things that nobody wants to think about, something that should be reserved for losing players in the game of Life (the board game, that is). Unfortunately, sometimes people get into a hole that they aren't sure how to dig themselves out of, and it seems as if bankruptcy is the only option. Here are some things to consider before going that route.
What is bankruptcy?
Bankruptcy is a method of suspending or discharging your debt. When you file for bankruptcy, the course grants an "automatic stay", which keeps creditors from contacting you or otherwise attempting to collect your debts. (Note that while this is true of unsecured loans such as credit card debt, holders of secured loans backed by real property may still be able to take possession of said property). If the bankruptcy is successful, then debt is discharged; any debts you incurred prior to filing bankruptcy are essentially forgiven. In exchange, you must turn over all non-exempt property to a court-appointed trustee, who will sell it and use the proceeds to pay your creditors.
What is the difference between chapter 7 and chapter 13 bankruptcy?
A chapter 7 bankruptcy is a "straight" bankruptcy; you turn over all of your assets to a trustee, who then liquidates them; only your current assets are lost. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it much more difficult to file for chapter 7 bankruptcy. In a chapter 13 bankruptcy, you still repay your creditors, but the court will approve a payment plan, which can last up to five years. In this case, you are able to keep your assets, but must live on a budget and pay all excess income to creditors for the life of the plan; additionally, you may not take on new debt or sell assets without the court's permission.
Chapter 7 and chapter 13 are both types of personal bankruptcy; chapter 11, which is normally used by corporations, is also available to individuals who run a business and wish to stay in business. It is used to restructure business debts and retain assets while reorganizing under the court's supervision.
What assets are exempt?
Exactly what is exempt varies from state to state. In the 16 states that did not opt out, you can choose between the federal or state exemptions; the federal exemptions follow.
Your home is generally exempt, provided it was not purchased in the 1,215 days prior to filing for bankruptcy; otherwise, the homestead exemption is limited to $136,875. The auto exemption is $3,225, meaning you can keep your care if your equity (the current market value minus any loans against it) is less than that amount. You may also be able to apply other exemptions, such as that for tools of the trade, or you may pay the value above the exemption in order to keep the vehicle. Household goods and furnishings are exempt up to $10,775 total, $525 for a particular item. Finally, retirement funds are protected as well, with a Roth IRA cap of $1,095,000.
What debts cannot be discharged?
You cannot discharge student loans, taxes, alimony, child support, or debts incurred through fraud or theft.
How does the IRS handle bankruptcy?
When you file for bankruptcy, the IRS and state tax collectors will stop attempting to collect owed taxes. However, because you cannot discharge a tax obligation through bankruptcy, collection activities will soon resume under chapter 7, and interest and penalties will continue to add up. A chapter 13 filing, however, will allow you to negotiate a payment schedule with the IRS, halting the accumulation of penalties and interest.
Before considering bankruptcy, you should talk to an advisor, and possibly a bankruptcy lawyer. Bankruptcy forms are available from the US Courts website.
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