A new federal law about bankruptcy came into effect in November 2005. It has become somewhat more difficult for debtors to get rid of debts ever since then. The law requires that a person in debt must address a professional debt management or debt consolidation company prior to filing for bankruptcy. The debt management or debt consolidation company must first review the financial situation of the debtor and see if there is a way he can restructure his debts, or create a repayment plan on better and more affordable conditions in order to pay out his debts. Only in case an accredited debt consolidation or debt management company makes a statement that there is nothing that can be done to repay the debts, the debtor may file for bankruptcy.
All About Bankruptcy In Detail
A federal court procedure designed to help consumers and businesses to wipe out their debts (or pay them under the protection of the federal court) is called bankruptcy. Individuals as well as businesses can file for bankruptcy, and in some instances, a creditor (whether a person or business) who owes funds via an involuntary procedure may force the declaring of a bankruptcy procedure. The second case is rather rare. When you file for bankruptcy, all your debts are then discharged and no legal actions can be taken against you. However, bankruptcy does not discharge all of your debts
Reasons to declare bankruptcy
- Accidents, act of God: most people filing bankruptcy in the US do this for the reasons of bad and decreasing health condition. Medical bills cause half of the bankruptcy cases in America. Among other reasons are: loss of job, unemployment, accidents, natural disasters or crime. All of that can easily damage or ruin anybody’s bank account.
- Wrong decisions, careless management of personal finance. Our own irresponsible behavior is another reason for bankruptcy. Gambling, thoughtless spending, extravagant lifestyle, risky businesses, as well as divorce can also cause huge financial troubles.
Types of bankruptcies
Bankruptcy is regulated by three chapters: Chapter 7, Chapter 11 and Chapter 13. Most common types of bankruptcies are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy – a straight bankruptcy or a liquidation proceeding. In this case, the debtor is allowed to keep certain type of property (exempt property), therefore, the property they must give up is called non exempt property. In case you file for bankruptcy according to Chapter 7, you free yourself from your debts in exchange for some kind of property. The non exempt property is then handed to the court trustee to sell these assets and distribute cash to the creditors.
Bankruptcy or Debt Consolidation?
Are you in debt up to your neck and you finally find yourself unable to pay the bills anymore? If yes, then you are probably already considering either of the options – bankruptcy or debt consolidation. And probably, the TV ads are telling you that both declaring bankruptcy and debt consolidation are easy and efficient way to solve your financial problems. If we take a superficial look at both things, debt consolidation seems like a better solution rather than bankruptcy, but there are pros and cons to both approaches. Bankruptcy is not a dead end to your life, you know. However, it does bring some essential changes, most of them are not positive.
Let’s see the facts about debt consolidation. A debt consolidation program (also called debt management) implies signing a contract with a debt consolidation agency. Financial advisors then negotiate on your behalf with your creditors in order to work out a repayment plan with lower interest rates and lower monthly payments. Plus, it will put an end to the harassing phone calls from your creditors.
There are some significant advantages to the debt consolidation, other than lower interest rates and monthly payments. Instead of multiple payments to numerous creditors you will only have to make one payment every month. Most creditors participate in debt consolidation programs, besides if you use the services of a reputable agency they probably have established connections with the major creditors, which simplifies the negotiation process. Your financial expert usually takes care of all paperwork, so you don’t have to deal with the creditors anymore. You will continue receiving statements from your creditors anyway, so you have a chance to track things down. The debt consolidation company may as well offer you a direct transfer of the monthly payment from your account on the same date each month.