If it seems there is just no other way to get out from under that crushing load of debt – whether it’s paying off your credit cards, debt consolidation, a home equity loan, debt settlement – that none of these will work for you, you can file for bankruptcy.
The U. S. Congress made many changes to bankruptcy in 2005 with a new law titled, “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.” Unfortunately for consumers struggling with debt, it ended up protecting the credit providing companies more than it protected consumers.
In general, there are two types of bankruptcy proceedings, the first, a Chapter 7 Bankruptcy called liquidation, is the type most commonly used by consumers. In this proceeding, a trustee is appointed by the court who collects all the debtor’s “non-exempt” property, sells it, and distributes the money to his or her creditors.
A second, less popular type of proceeding is a Chapter 13 proceeding, which allows debtors to keep all their property and repay all or part of their debts with future earnings. In either case, creditors for the most part may not try to collect any debts outside the proceeding. Debtors are not allowed to transfer any property that has been declared part of the estate and subject to the bankruptcy proceeding.
Thanks to the law passed by Congress in 2005, debtors must get credit counseling before filing for bankruptcy.
What property is exempt?
The law recognizes that bankruptcy shouldn’t leave you out on the street with only the clothes on your back. It allows you to keep what’s called exempt property that includes your personal possessions (clothing, furniture and the like) and your house – with certain limitations.
So what about your house and car?
In the case of your house, there is what’s called a homestead exemption. It varies from state to state. For example, in New York, the homestead exemption is $50,000 to $150,000, depending on where you live. This means that if you have equity in your house of less than $50,000 or $150, 000, you would be allowed to exempt it – or keep it out of the bankruptcy.
It’s really important that you talk with an attorney before you file for bankruptcy so you will know about the homestead exemption where you live and whether you will be able to keep your house.
You should also be aware that in a Chapter 7 Proceeding, it’s possible your trustee will sell your house to help pay off your creditors. This means that filing under a Chapter 13 Proceeding might make more sense as you will be allowed to pay off your debts, including your mortgage, over a period of time.
The Federal exemption of a car is $3,450. Your equity in the car is the car’s market value less any loans you have against it. If your equity is more than the $3,450, you might be able to apply exemption amounts from other categories like “tools of the trade.
Also, thanks to a decision made by the Supreme Court, you can keep your retirement accounts to a cap of $1,171,650. Since you’re filing for bankruptcy to get out of debt, you probably won’t have to worry about exceeding this cap.
Talk with an experienced lawyer
Before you file for bankruptcy, be sure to talk with a lawyer that has good experience in handling these cases. You will need advice as to whether you’d be better off filing under a Chapter 7 or a Chapter 13 Proceeding, whether you will be able to keep your house or car, if you have property that could be exempted as “tools of the trade,” and more. We have seen advertisements by lawyers who will handle a bankruptcy for as little as $750. But remember that in a bankruptcy, as in many things, you get what you pay for.
Bankruptcy should only be used when all other debt management methods have failed. You should look into debt settlement before you consider filing for bankruptcy. Most consumers will not qualify for Chapter 7 bankruptcy so even if you do file you will still have to pay back most of what you owe. Plus your credit gets ruined for 7 to 10 years.
If you really want to manage your debt problems sensibly, look for bankruptcy alternatives such as debt settlement.