The Basics of Bankruptcy

Most people don't understand bankruptcy until they are faced with it. Even then, a lot of people still don't understand what is really happening. In the most general terms, bankruptcy allows a person having financial difficulties to wipe out his or her debt and start fresh. People file bankruptcy for numerous reasons: divorce, unemployment, death in the family, lawsuits, illness, medical bills, foreclosures and credit card debt.

Bankruptcy allows the creditor to receive a fair share of the money that the debtor can pay back, while giving the debtor a fresh start. There are two types of bankruptcy to fulfill this need: Chapter 7 and Chapter 13.

Under a Chapter 7 bankruptcy, all unsecured debts are wiped out. These debts include medical bills, legal fees, utilities, deficiency balances and credit card debt. The debtor may lose property to the court that will be sold in order to pay creditors. There are certain debts that will remain. By law, they cannot be discharged through Chapter 7. These debts include alimony, child support, taxes, certain student loans and debts from fraud, larceny and fines.

Chapter 13 bankruptcy helps people with regular incomes that wish to pay their debts but are unable to do so at the current time. With court supervision, a repayment plan is established between the debtor and his creditors that will pay the debts under an extended period of time.

In 2005, a new law was established -- the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. So many consumers were abusing bankruptcy. You may have heard of people simply filing for bankruptcy repeatedly. Some simply had their debts discharged and went out and bought until they were in the same situation again. Other consumers needed protection from unethical lenders. This law makes it more difficult for consumers to file for bankruptcy.

Before a bankruptcy can be filed, the debtor must enroll in a credit counseling session. Before the bankruptcy is complete, the debtor must complete a financial management seminar. The consumer will learn to budget, manage money, use credit wisely and the basics of consumer information. These classes aren't always free, some come with a mandatory fee.

Means testing will also apply to bankruptcy filings. The means test is an effort to force more debtors into Chapter 13. Any debtor who is able to repay 25% of what they owe, or $10,000, to his or her creditors will not be allowed to file for Chapter 7 bankruptcy. Basically, if the debtor is proven to be able to pay back a significant portion of his debts in the next five years, then he should be required to.

Financial advisors will tell you that bankruptcy should be your absolute last option. It will ruin your credit history. It isn't easy to be granted bankruptcy and it isn't easy to get over it. You should consider every available option before you decide to file bankruptcy. Often, you can go ahead and attend a consumer financial management class. Learn how to get out of debt and avoid bankruptcy.