If you have no other options, bankruptcy can allow you to have a “fresh start” but it comes at a price.

Bankruptcy allows individuals or businesses who owe others more money than they’re able to pay to either work out a plan to repay the money over time or completely eliminate (”discharge”) most of the bills. With few exceptions, any person or business owing money to a creditor can file a bankruptcy petition. When filing bankruptcy, there are the two types of debt to look at, Secured and Unsecured Debt. Secured debt is a creditor’s claim that is secured by a lien of some type in your property, either by your agreement or involuntarily such as with a court judgment or taxes.

A creditor can generally claim the property that secures the debt in the event of bankruptcy. Unsecured debt is not tied to any type of property, leaving the creditor without any claim to property. However, some situations may not warrant filing for bankruptcy. If your financial situation is temporary, you may consider making arrangements with individual creditors for a change in payment amounts or a reduction in the total amount due. If an individual has little in the way of property or money, filing bankruptcy may not be necessary, as the creditor may not be able to collect the debt.

Types and Chapters of Bankruptcy

Consumers typically file Chapter 13 bankruptcy, where repayment is made to creditors, or under Chapter 7 where the debts are discharged. Each chapter of bankruptcy spells out what bills can be eliminated How long payments can be stretched out What possessions you can keep.

The selection of which type to file depends on your particular circumstances and whether or not there are assets available to repay all, or part, of the debts owed. Bankruptcy laws can be complicated, so determining if you should file and what type of bankruptcy you need should be made with the input of an experienced bankruptcy lawyer. Generally, you can convert a case once to any other chapter for which you are eligible. The request to convert can be a simple one-sentence document.

There are issues to watch when going from on chapter to another, though. For example, when moving from a Chapter 13 to a Chapter 7, you will need to review whether you have acquired items that will now be considered property of the estate under Chapter 7 that was not part of the previous filing. There are, however, limitations on how often you can file. A Chapter 7 bankruptcy can be filed every 8 years from a previous chapter 7 filing or 6 years from a prior chapter 13 filing. Chapter 13 can be filed 4 years from a prior Chapter 7 filing or 2 years from a prior Chapter 13 filing. Filing bankruptcy can adversely affect your ability to obtain future credit, rent housing and even negatively impact a job application, so any decision to file must be carefully considered.

How to Begin

There are a few things you must do when preparing to file bankruptcy. You need to compile a listing of the past and present debts you have. The petition in a bankruptcy filing includes schedules of assets and liabilities as well as a statement of financial affairs. These documents are filed with the bankruptcy court, along with payment of the filing fee. Also, talk with your spouse or significant other before filing. If one spouse files and the other does not, the one who does not file could possibly be responsible for the debts. Check this out carefully before filing.

When finally deciding to file with your spouse, you must choose between A joint petition or a single bankruptcy petition. A joint petition is the filing of a single bankruptcy petition by an individual and the individual’s spouse. Only people who are married on the date they file may file a joint petition. Unmarried partners must each file a separate case. In the case of a divorce, you may still be responsible for some debt. If you are a co-signor with your ex-spouse on a debt, the creditor can require the entire payment of that debt from you even though the divorce decree assigns the debt to your ex-spouse. Your divorce decree may address any recourse you may have against your ex-spouse should he or she default on the loan obligations set out.

What Can’t be Discharged

The debts that cannot be discharged vary between the different chapters of bankruptcy. Generally, the following cannot be discharged:

• Debts for taxes owed to local, state or federal agencies
• Debts for money, property, services, or an extension, renewal, or refinancing of credit, which was obtained fraudulently
• Debts which were neither listed nor scheduled or which the debtor waived discharge
• Debts which are owed to a spouse, former spouse, or child of the debtor, for alimony, maintenance, or support of such spouse or child, in connection with a separation agreement, divorce decree or other order of a court of record
• Debts owed for willful and malicious injury by the debtor to another person or property owned by another.
• Debts for government-sponsored educational loans, unless it can be shown that repayment will cause an undue hardship
• Debts for death or personal injury caused by the debtor’s drunk driving or from driving while under the influence of drugs or other substances
• Debts incurred after a bankruptcy was filed

What you lose and keep in bankruptcy

Exemptions allow an individual to “exempt”, or keep, certain kinds of property. State law defines what assets are considered exempt, but typically includes:

• Jewelry
• Vehicles up to a certain amount
• Equity in a home up to a certain amount
• “Tools of the trade” or tools and equipment necessary to allow the individual to continue working

Retirement accounts are typically kept. Accounts that are ERISA-qualified are not considered property of an estate and cannot be taken. Social Security benefits are generally protected from assignment or garnishment for debts in bankruptcy. The Social Security Administration’s responsibility for protecting benefits against legal process and assignment usually ends when the beneficiary is paid. Once paid, the benefits continue to be protected only as long as they can be identified as Social Security benefits. For example, money in a bank account where the “only” deposits into the account are direct deposits of Social Security benefits are identifiable and generally protected.

Losing your home is a possibility. The factors that affect your ability to keep your home are:

• The state you are in and the exemptions allowed
• The status of your loan (current or in foreclosure)
• The type of bankruptcy you’re filing (Chapter 13 provides more protection than Chapter 7 as long as payments are current)

Credit Repair Companies

Most consumers can be just as effective as a credit repair company in dealing with credit reporting agencies and improving their credit ratings — it simply takes time and patience. While there are non-profit companies in each state that offer credit guidance for a small fee, “We can fix anything” credit repair companies offer very little in comparison to the fees they charge.

Creditors after Bankruptcy

During the time the debtor is working out a plan or the trustee is gathering and preparing the assets to sell, the bankruptcy code dictates that creditors must stop all collection efforts against the debtor. As soon as the bankruptcy petition is stamped “Relief Ordered” upon filing, you are immediately protected from your creditors. If a creditor continues to attempt to collect a debt, immediately notify the creditor in writing that you have filed bankruptcy, and provide them with both the case name number and filing date, or a copy of the petition that shows it was filed. If the creditor continues to collect, the debtor may be entitled to take legal action against the creditor.

The bankruptcy court notifies, by mail, all creditors advising them of:

• The filing of the bankruptcy
• The case number
• The automatic stay
• The name of the trustee assigned to the case (if filed under chapters 7 or 13)
• The date set for the meeting of creditors
• The deadline, if any, set for filing objections to the discharge of the debtor and/or the discharge of specific debts
• Whether and where to file claims

The exact information in the notice may be slightly different depending on the chapter under which the case is filed.

Each type of bankruptcy allows creditors to object to specific debts included in the plan or the manner in which the plan addresses the repayment or discharge.

In Chapter 7 Bankruptcy, creditors generally have 60 days after the first creditors meeting to object to the discharge of a specific debt. If no objections are filed, the court will issue the discharge order and the trustee will proceed to collect and sell the assets, then distribute the proceeds to the creditors under a predetermined system. If there are objections, the bankruptcy itself, less the objected debts, continues through to discharge. It may be necessary to have a trial before a judge to resolve the items that creditors objected to.

In a Chapter 13 case, creditors are given an opportunity to object to the plan for repayment. If there are no objections filed by creditors or the trustee, the plan may be confirmed as filed. After the plan is confirmed, the trustee will distribute the payments from the debtor to creditors until the plan is completed. Upon completion of the Chapter 13 plan, the court will issue a discharge order, the trustee will prepare a final report, and the case will be closed.

Bankruptcy is complex and must be done right for you to be protected.  I highly recommended consulting with a lawyer before making a decision.