The University of Alabama

DEBT MANAGEMENT

Bankruptcy

Bankruptcy is a legal proceeding in which an individual who cannot pay his or her bills

can get a fresh financial start. The right to file for bankruptcy is provided by federal law, and all bankruptcy cases are handled in federal court. Filing bankruptcy immediately stops all of your creditors from seeking to collect debts from you, at least until your debts are sorted out according to the law. Bankruptcy should always be seen as a last resort option.

However, filing bankruptcy has major personal credit consequences. Filing bankruptcy can appear on your credit record for ten years. Many lenders may see this as being a credit risk and you may have extreme difficulty obtaining new credit.

2005 Bankruptcy Act Credit Counseling

The 2005 Bankruptcy Act requires all individual debtors who file bankruptcy on or after October 17, 2005, to undergo credit counseling within six months before filing for bankruptcy relief and to complete a financial management instructional course after filing bankruptcy.

 

Chapter 7 Bankruptcy

In a bankruptcy case under chapter 7, you file a petition asking the court to discharge your debts. The basic idea in a chapter 7 bankruptcy is to wipe out (discharge) your debts in exchange for your giving up property, except for "exempt" property which the law allows you to keep. In most cases, all of your property will be exempt. But property which is not exempt is sold, with the money distributed to creditors. If you want to keep property like a home or a car and are behind on the payments on a mortgage or car loan, a chapter 7 case probably will not be the right choice for you. That is because chapter 7 bankruptcy does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.

 

Chapter 13 Bankruptcy

In a chapter 13 case you file a "plan" showing how you will pay off some of your past-due and current debts over three to five years. The most important thing about a chapter 13 case is that it will allow you to keep valuable property--especially your home and car--which might otherwise be lost, if you can make the payments which the bankruptcy law requires to be made to your creditors. In most cases, these payments will be at least as much as your regular monthly payments on your mortgage or car loan, with some extra payment to get caught up on the amount you have fallen behind. You should consider filing a Chapter 13 if you:

  • own your home and are in danger of losing it
  • are behind on debt payments, but can catch up if given some time
  • have valuable property which is not exempt, but you can afford to pay creditors from your income over time

You will need to have enough income in chapter 13 to pay for your necessities and to keep up with the required payments as they come due.