A Closer Look At Bankruptcy

The federal courts have a process known as bankruptcy which is designed to help individuals and businesses clear their debts and manage repayments under the protection of a bankruptcy court. The two kinds of bankruptcy are: reorganization and liquidation.

Liquidation is a bankruptcy process where you make a plea to the court to discharge your debts on your behalf. Some of your properties are liquidated (sold) by the court, and the proceeds are shared among your creditors. Liquidation only lasts four-to-six months, and normally you only need to attend court once.

Liquidation is not an option for everyone. If you have used bankruptcy in the past six-to-eight years, you are not eligible. Also if after consideration of your debts, income, and expenditures it is determined that another form of bankruptcy would be more applicable to your situation, you will not qualify. Disabled veterans, however, who have amassed debts while in the military will normally be permitted to file. Similarly if your debts are a result of your business, you can file for liquidation as well. Outside of these categories, you must meet certain criteria.

One such consideration is that your income for the past six months prior to the date of filing will be compared with the median income of other similarly sized families in your area. If after calculations your income seems to be sufficient to support other bankruptcy proceedings - regardless of permitted expenses - liquidation will not be allowed. Social Security payments are not included in this total.

Liquidation is the form of bankruptcy that most people prefer. This is because the court will normally allow you to keep some amount of your possessions so that you are not destitute after the proceedings. That sort of legal flexibility allows a person to begin their “financial life” over without depriving them of everything. Plus it provides back to creditors at least some amount previously owed.

The other form of bankruptcy, reorganization, is a method in which you communicate to the court how much you intend to pay your creditors to clear your debts. Normally this is part of a 3-5 year plan. If maintained successfully, you can be freed of your debts if there is anything left outstanding. Sometimes a court will look at a person’s finances and even free a person before the plan has been completed.

If you do intend to file for bankruptcy, you will also be required to undergo credit counseling through a recognized and approved agency. During this process, you will be encouraged to look closely at your finances and make an informed decision whether you really do need to go down the road of bankruptcy at all. By doing this, you can better determine if you have missed any viable options for arranging agreements with your creditors and potentially avoiding the more drastic step of bankruptcy altogether.

Whatever the outcome, you will still need to complete post-bankruptcy counseling. The purpose is to ensure you do not allow your finances to become unmanageable in the future.