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Saturday, October 25, 2014   
 

What to Know Before You File For Bankruptcy
by Becky Schmitz
Becky Schmitz is a certified tax resolution specialist and enrolled agent. Named 2006 Top Practitioner by the American Society of Tax Problem Solvers, she is the owner of Centsable Accounting, a tax problem resolution company based in Montana, but serving the entire U.S. As part of many tax problem resolution offered, Centsable Accounting offers assistance with bankruptcy.
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Becky Schmitz

You may feel you don't have any other options. Maybe you owe several people money, your credit is maxed out, and you are falling deeper into debt, so you start to explore filing for bankruptcy. You thought you never would, but you've heard about it, maybe even someone you know has done it and the question you want to know is when should you? All types of bankruptcies exist: chapters for businesses, individuals, even a chapter for farmers and fishermen.

First, understand that two main types of bankruptcy exist for individuals:

Chapter 7 is a straight or liquidation bankruptcy, meaning the debtor's nonexempt property is sold to pay creditors. Because of the means test, this type of bankruptcy is more difficult to file.
Chapter 13 is a repayment plan for individuals, usually allowing them 3 to 5 years to pay off their debt.

Chapter 7 bankruptcy accounts for almost two-thirds of all bankruptcy filings. For those wanting a fresh start faster, Chapter 7 bankruptcy may be the bankruptcy to go with over Chapter 13. The case is often over in less than 6 months and no minimum debt is required. Additionally, with Chapter 7, debtors can sign a "Reaffirmation Agreement" where they can keep certain assets like a car or house while continuing to pay a loan or mortgage. A negative of Chapter 7 bankruptcy, however, is that co-signors of a loan can be stuck with your debt unless they also file for bankruptcy.

File Chapter 7 bankruptcy if you:

Have completed mandatory credit counseling.
Are ready to sell nonexempt property and distribute the proceeds to your creditors.
Have property left over so that when you are finished selling the property to pay off your debt, you will be able to start over again financially.

Chapter 13 may be a more suitable choice if you have valuable property you want to keep or have too much income to file a Chapter 7 bankruptcy. With Chapter 13, debts can be reduced, and you have more time to pay off the debts that can't be discharged from either type of bankruptcy. This type of bankruptcy allows you to separate creditors where they receive different percentages of payment so debts with a co-debtor can be treated differently than debts on your own. Disadvantages to a Chapter 13 bankruptcy include having to use post bankruptcy income to pay off debts, incurring higher legal fees because filing Chapter 13 is more complex, not being able to file if you are a stock or commodity broker, and needing to be involved in the bankruptcy court process for as long as it takes you to pay off your debts (3 to 5 years).

File Chapter 13 bankruptcy if you:

Have completed mandatory credit counseling.
Have a regular income but need time to pay off debts.
Meet the debt limit. The limit varies but the most debt you can have for a Chapter 13 bankruptcy is typically around $1 million. Unsecured debts have to be under an amount around $300,000 and secured debts should be under around $700,000.
Are not filing for a corporation or partnership.
Want co-signors to be immune from collection efforts if the plan is a full payment one.

Now that you know the types of bankruptcy filings that exist, and have an idea of what type of bankruptcy might be best for you, don't stop there. Most likely, there are other questions that you need answered. Below are a few of the most common:

What effect will bankruptcy have on my credit? Your credit history may already be poor, but keep in mind that a bankruptcy will remain on your credit report for up to 10 years. Of course, credit can be re-established.
Will my coworkers, neighbors, and friends know that I have filed for bankruptcy? Though employers and landlords will not be sent notices or otherwise directly informed about your bankruptcy, anyone can find out that you filed because bankruptcy is a public record. If a potential employer does a credit check, bankruptcy filings will show up on that report, which can seem like bad credit is on your record even years after the bankruptcy was filed.
Will bankruptcy prevent me from having my wages garnished? Both Chapter 7 and Chapter 13 grants protection against wage garnishment and creditor collection.

What does bankruptcy cover?

Credit card debts
Medical bills
Unsecured loans

What types of debts are not erased with bankruptcy?

Student loans
Alimony and support
Debts from fraud
Drunk driving compensation
Tax bills

Contact the organizations affiliated with these types of debts to work with them directly.

Under certain circumstances, income taxes may be discharged in bankruptcy. Usually taxes must be at least 3 years old, assessed at least 240 days prior to bankruptcy filing, and filed voluntarily at least 2 years ago. Consult a tax professional regarding details. With Chapter 13 bankruptcy, payment plans can often be worked out for taxes.

Other options exist to help with financial difficulties. Contact a qualified tax professional to discuss your situation.

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