Understanding New Laws for Personal Bankruptcy

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Understanding New Laws for Personal Bankruptcy

People often turn to personal bankruptcy when they are overwhelmed with debt. However, this debt relief option should only be considered as a last resort. Filing bankruptcy is a costly, stressful process that can cause serious credit damage that takes years to overcome.

Some people use personal bankruptcy as a way to stop foreclosure. While it is true, bankruptcy can halt the foreclosure process, debtors are required to adhere to a repayment plan to cure mortgage arrears. If debtors are financially incapable of repaying past due amounts, they will fail out of bankruptcy and lose their home to foreclosure.

New bankruptcy laws took effect in 2005 which require debtors to file Chapter 13 bankruptcy and repay a portion of their debts through a payment plan. Prior to the new laws, many debtors filed Chapter 7 which is often referred to as ‘fresh start’ bankruptcy.

Chapter 7 requires debtors to relinquish valuable assets to the bankruptcy Trustee who in turn returns the property to the lien holder or sells the property to pay off outstanding debts. Remaining debts are written off and debtors walk away with only damaged credit.

Under Chapter 13, debtors can retain assets, but must adhere to a Chapter 13 payment plan. Chapter 13 payments are in addition to normal expenses. Individuals who are struggling to make ends meet often find Chapter 13 plans to be extremely restricting. In addition to the payments, debtors are not allowed to incur new debt unless they obtain approval from the court.

All debtors are required to undergo credit counseling before bankruptcy approval is granted. Credit counseling must be obtained through an agency approved by the U.S. Trustee. Upon completion, debtors present a certificate of completion to the court.

Debtors should retain the services of a bankruptcy lawyer to ensure compliance with the Bankruptcy Abuse Prevention and Consumer Protection Act. It is recommended to consult with multiple attorneys to determine which law firm is best suited for the petitioner’s needs. Personal bankruptcy can be a highly-charged event. Hiring bankruptcy attorneys whose personalities are compatible can ease the process.

Debtors should organize financial documents prior to attending attorney consultations. Bankruptcy lawyers require wage statements, banking records, list of income and expenses, contact information for creditors, property tax records, and tax returns.

Soon after the bankruptcy petition is filed, debtors attend a 341 creditor meeting and submit a proposed payment plan to the court. Once Chapter 13 plans are approved, debtors submit payments to the bankruptcy Trustee. Payments are distributed to creditors until debts are fully paid.

When debtors fail to comply with payment plans, creditors can seek bankruptcy dismissal. If this occurs, debtors lose court protection and creditors can commence with collection action. Failing out of bankruptcy can cause severe credit damage that can take years to recover from. Debtors will find it next to impossible to obtain credit of any kind for two or more years.

Personal bankruptcy is reported for up to seven years and can reduce credit scores by 100 points or more. Debtors should research bankruptcy alternatives such as debt settlement or debt consolidation prior to submitting their bankruptcy petition. These options can sometimes provide the same result without the severe consequences often associated with bankruptcy.

Learn more about personal bankruptcy from California real estate investor, Simon Volkov. He shares a vast personal finance library covering topics of foreclosure, bankruptcy prevention, debt relief strategies, and bankruptcy alternatives at www.SimonVolkov.com.
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