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• Chapter 7 Bankruptcy
• Chapter 11 Bankruptcy
• Chapter 13 Bankruptcy

These terms strike fear in the hearts of worried citizens all over the country as they take the difficult steps of running their home financial figures, figuring out which bills not to pay in today’s economy instead of working on which bills they should pay.  What’s the difference in bankruptcy options?

You are faced with a decision to declare bankruptcy and wonder if what you have always heard and never imagined would happen to you - are they true?  Is it really about being protected?  Will bankruptcy be a "black mark" on my financial history or remain in your "permanent record" forever?  These thoughts which are swirling around in the heads of Americans in numbers we’ve not seen in a very long time can be overwhelming.

Should you file for Chapter 7 Bankruptcy?  As a for instance, if you’re currently unemployed with no source of income, Chapter 7 would be a realistic option unless you have family contributions or other sources of income. If  you’re a homeowner and not willing to surrender the home, preferring instead to maintain current mortgage payments - you would have to have some source of income or other financial assistance to pay them.

What about Chapter 11 Bankruptcy?  This is generally not a personal bankruptcy option. It is a chapter of the United States Bankruptcy Code which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to any business , whether organized as a corporation or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy.

What is a Chapter 13 Bankruptcy?  Well, this is another personal bankruptcy option.  This is an option whereby the consumer can reorganize their debt load.  The Chapter 13 is based on whatever available income there is in the family.  The process calculates your current monthly income and all of your expenses and what remains can be distributed to your unsecured creditors.

How will bankruptcy affect your future?  Can you survive a bankruptcy?  Should bankruptcy be avoided at all costs?  It is most certainly survivable and a person can emerge from a bankruptcy situation with a fresh start financially.  However, what needs to change is your spending habits.  You have to assess what your needs are and separate them from the things you want.  Want vs. Need.  An honest assessment and preparing to live within your means is of paramount importance in order to come out of a bankruptcy smarter and with a focus of avoiding the mistakes and circumstances which brought you here in the first place.  The key is to learn from your history so that you are not "doomed to repeat it."

Critical Tip: Don’t tap into your retirement fund(s) in order to try to keep your head above water at this critical time.  Retirement funds cannot be seized in a bankruptcy proceeding! Leave them alone so that they may serve their purpose - availability during your retirement years.

The new bankruptcy laws passed in 2005 created several new forms that must now be included in a bankruptcy petition, including the Means Test in a Chapter 7 bankruptcy. The means test is supposed to tell the court whether or not you have enough disposable income left after paying your necessary living expenses to pay at least some amount to your creditors in order to settle your debts, rather than wiping them out. According to the credit companies that lobbied congress for the bankruptcy law changes, most people who file bankruptcy really can afford to pay their debts but they just don’t want to. In the last 3+ years since the bankruptcy law went into effect, we’ve seen this isn’t the case, but you are still required to complete this paperwork as well as the other changes that were ordered like the pre-bankruptcy credit counseling and post-bankruptcy personal financial management courses.

The bankruptcy means test consists of 57 questions about your income and expenses which are then compared to national and regional averages to determine if you make and spend more than most people in your area, as well as what your disposable income is or should be. If most of your debt is not primarily consumer debt, or you are a disabled veteran “the presumption does not arise”, and you do not have to complete the majority of the form. The “presumption” is a nice way of saying whether or not you may be trying to abuse the bankruptcy system. If the presumption does arise at the end of the means test you may be forced to file a Chapter 13 bankruptcy.

The second section will determine your income. You, and possibly your spouse, depending on how you plan on filing bankruptcy, will answer questions on your gross wages, business income, rental/property income, interest/dividends earned, child support, pension and any other income, averaged for the last 6 months. The third section will determine your average yearly income and compare it to the median family income based on the state you live in, and the size of your family. If your income is more than the average for your family size in your state you will have to continue filling out the means test, if it is less than the presumption does not arise.

In part five you will deduct standard expenses for your family based on regional numbers the government has declared as acceptable for your area and family size, including food, clothing, health care, housing and utilities, transportation and other necessary expenses. There is space for you to show that you spend more than the standard amounts, but you must be able to show receipts for these expenses for at least the last 6 months in order to submit that to be considered by the court.

In part six the deductions listed in part five are calculated and used to determine how much disposable income you have left over. If you have less than $6575 a year, the presumption does not arise, if you have over $10,950 the presumption does arise, and if you have somewhere inbetween $6576 and $10,949 you must continue with the means test form which compares the amount of unsecured, non-priority debt you have with your disposable income.

The bankruptcy means test can be intimidating, and can seriously affect your ability to file ch 7 bankruptcy, so you should consult a bankruptcy attorney before proceeding with your bankruptcy filing.

Part of the new bankruptcy laws is mandatory credit counseling that must be complete before filing bankruptcy and a personal finance certification course that must be completed after filing your bankruptcy petition. The two courses are to help you determine if bankruptcy is your only option and hopefully help you create a better financial plan for moving on after your bankruptcy is completed.

Credit Counseling - The credit counseling must be completed with 180 days before filing your bankruptcy petition. Each state has credit counseling centers that have been approved by the bankruptcy courts. The counseling centers offer the credit course in person, and some offer the course over the phone or online.

The course contains three portions: the first portion looks at your current financial situation including your debts and assets, the second portion creates a plan to help you budget your current debts, and the last portion of the counseling takes a look at your options including filing bankruptcy. The credit counseling is not set up to tell you that you cannot file bankruptcy, but it is there to try to get you to take advantage of other options that may be available. Speaking with a bankruptcy attorney at the same time can help you make the right decision for your situation. The average cost of the credit counseling is about $40.

Personal Financial Management Course - After your bankruptcy petition has been filed, the bankruptcy court will instruct you to attend a personal financial management course at an approved location in your bankruptcy district. Just like the credit counseling, the course can typically be completed in person, over the phone or online. This course is designed to help you make good financial choices after your bankruptcy and covers topics like budget development, smart shopping, and the wise use of credit. The average cost of the personal financial management course is about $30.

Keep in mind that both of these requirements were supported by credit companies that don’t want your debt to be wiped out, it’s not because everyone who files bankruptcy does so because they simply didn’t manage their money the right way. Most bankruptcy filers file due to excessive medical bills, a job loss or divorce that created financial problems.

The current economic recession has millions of families falling into financial despair. Americans are considering bankruptcy at a nearly unprecedented rate. In addition, there is a growing consideration of a hardship withdrawal of 401k retirement accounts in a last effort to access cash necessary to meet financial obligations and possibly avoid a personal bankruptcy. However, the penalties and taxes charged for prematurely tapping these pension funds may be the least of the obstacles to negotiate before actually obtaining access to the much needed funds.

If one is considering withdrawing from a 401k account and filing for bankruptcy, it may be more beneficial to consider filing for bankruptcy before turning to the 401k retirement account. By law, the 401k retirement account is protected from bankruptcy and all creditors, as long as the money remains in the account before the 59th birthday of the account holder. Anyone holding a 401k account in these economic times should consider the following 1) what to do with the 401k account should changes in employment occur and during a bankruptcy filing and 2) what to consider should the funds within a retirement account come under immediate need during a bankruptcy.

Employees must consider professional management of their 401k in case of loss of employment or change of job as unemployment levels reach record proportions. Employers generally forward the retirement account holdings to the former employee after employment ends. The immediate experience of unemployment may place additional strain on a household’s finances and the temptation to access one’s retirement account early can become even more enticing. However, receiving cash from a retirement account prior to bankruptcy will appear as income and may make qualifying to file for chapter 7 bankruptcy more difficult. In addition, if the retirement account holder becomes unemployed and rolls over the 401k to an IRA or Roth IRA, then depending on the state, the retirement funds may become part of the bankruptcy estate and paid out to creditors. A consultation with a state-licensed financial advisor should be sought in all cases. Each state has differing laws on the bankruptcy estates allowable administration of certain qualified retirement accounts (non 401k) in a bankruptcy case.

If the use of the 401k account funds is needed after filing bankruptcy, the chapter of bankruptcy will determine the process to access the funds. Loans on retirement accounts are popular and allow the account to remain intact without incurring penalties or taxes on the account loan proceeds. Loans on 401k accounts are not able to be discharged in a bankruptcy, they must be repaid. If the loan on a retirement account is requested after a discharge of a chapter 13 bankruptcy, the loan must be approved by the court trustee. It is customary in all chapter 13 filings that any new debt incurred by the filer must be approved by the bankruptcy court trustee and addressed within the payment plan. However, after a chapter 7 bankruptcy is discharged, a retirement account can be collateralized for an un-penalized and untaxed loan or entirely withdrawn minus penalties and taxes, if premature withdrawal is applicable.

Retirement accounts are an often tapped assets as households endure a growing need for cash. However, enticements to access these funds should be avoided without proper consultation by state licensed financial or legal advisers to determine if retirement account plans qualify under the state’s law to become a part of a bankruptcy estate.

The decision to file for bankruptcy is a tough one for the homeowner, but a choice millions of Americans are making each day as a result of the collapse of the housing market. While contemplating bankruptcy, the major concern of the homeowner is what happens to the home after filing. However, depending on the choice of filing chapter 7 or 13 bankruptcy, the homeowner can decide the fate of the home.

A chapter 13 bankruptcy allows the homeowner to not loose the home. The chapter 13 bankruptcy will reorganize the homeowner’s debt and create a payment plan. The homeowner will be required to provide a financial plan to maintain the home loan, satisfy the court’s payment plan to meet past due balances and any other financial obligations. If a Chapter 7 bankruptcy is chosen, the home will be relinquished to the titled lender and a foreclosure auction will take place after the bankruptcy is discharged. Oftentimes, homeowners file a bankruptcy to stop a foreclosure and allow more time to weigh financial decisions which will decide their home’s fate.

The majority of foreclosed or bankrupt homeowners eventually buy another home after their financial ordeal is long behind them. However, a re-establishment of a financial profile must be planned and properly managed before homeownership is to be re-considered. By rebuilding a credit profile the bankrupt homeowner is evidencing financial responsibility, creditworthiness and increasing the likelihood of purchasing another home sooner rather than later. A substantial savings should be accumulated, as buying a home after bankruptcy may require a larger cash down payment. FHA offers low down-payment mortgage loans and will finance the purchase of a home by a chapter 7 filer in as little as 3 years. In addition, a chapter 13 bankruptcy filer can refinance their existing home out of bankruptcy, as long as there is enough equity in the home to pay the bankruptcy claim. Some private mortgage companies will finance home loans after bankruptcy is filed as long as the borrower can prove to be financially able to afford the mortgage and maintain cash reserves. Anyone considering buying a home after bankruptcy should be mindful that a sizable down payment and higher than market interest rates may be a requirement of the home mortgage.

Bankruptcy can offer the homeowner a way to keep their home when a foreclosure is threatening or allow a homeowner to walk away from their home and gain a fresh financial start. Congress is considering changes to bankruptcy laws to allow the bankruptcy judge to re-write the mortgage terms to meet the present value of the home and the homeowner’s ability to pay for housing. However, the decision to file for bankruptcy should be based on the homeowner’s honest ability to sustain all financial responsibilities and not with the emotional attachment to property.