Facing a personal bankruptcy is something no one ever wants to experience. While some individuals have been irresponsible with their spending, many others have financial woes because of an unexpected life event. They may have gone through a divorce, which in itself isn’t cheap, and then are expected to help pay for two households instead of one. The cost for child support, legal fees, and the division of assets can create a lot of expenses.
Other individuals may have experienced a sudden life-threatening accident or illness. This can lead to a huge stockpile of medical bills, leaving them without the financial means to pay for everything. According to a Harvard University study, medical expenses are the number one reason for going bankrupt. In fact, 62% of all personal bankruptcies cited medical bills as the primary cause.
Unexpected events can happen to your personal property as well. There may be a catastrophic weather event, like a flood or earthquake. Many people do not have specialized weather-related insurance, and may find themselves having to rebuild their homes and replace their personal belongings with their own money.
Or, maybe a family member lost their job making it difficult to pay for housing, food, and monthly bills. Individuals who lose their jobs may not be lucky enough to have severance packages. Others may have terminated or laid off unexpectedly and did not have the time to plan ahead.
There are many reasons why someone might suffer a personal bankruptcy. In 2011, there were between 1.21 and 1.25 million people who filed for bankruptcy. And that number excludes those people who were near their breaking point, or were drowning in debt, but did not file for bankruptcy. Some people even lack the means to pay to file for personal bankruptcy at all. It is estimated that almost 1 million people cannot afford the $1,500 cost.
Types of Personal Bankruptcy
If you need to declare personal bankruptcy, be aware that there are three different types: Chapter 7, Chapter 13, and Chapter 11. Each has its own purpose and can lead to different results for your debt.
Whether you are single or married, the U.S. government will permit you to file Chapter 7 bankruptcy. This type of bankruptcy is the most common in the U.S. It essentially allows you to start fresh (with certain exceptions, of course). Once you file for Chapter 7, an administrator or trustee will go through your personal assets and sell them to raise money. Depending upon the state you live in, you may be able to keep certain items, like your primary residence. Once your assets have been liquidated, then the administrator will divide up the money to different creditors. It is likely that many of the creditors will not receive the full amount that you owe. If this happens, the rest of the debt is forgiven.
There are certain exceptions to Chapter 7 bankruptcy. First, you cannot file for Chapter 7 again for another 7 years. Some debt will not be forgiven, like student loans, child support, alimony, and taxes.
The U.S. Bankruptcy Trustee will assess your annual income. If you make more than the median income for your state of residence, then you have to pass the “means test”. If you will have more than $10,000 available over the next 5 years for debt repayment, then you need to file for Chapter 13 instead of Chapter 7. The government sets a baseline for what they consider “reasonable and necessary expenses”. If you tend to spend more than that per month, then you will likely qualify for Chapter 13 and not Chapter 7. For example, if you are single and spend over $500 per month on food and entertainment, but the government determines that only $300 is reasonable and necessary, then you have an extra $200 to spend toward your debt.
If you file for Chapter 13 bankruptcy, then the government assumes that you have a full time job and owe less than $383,175 in unsecured debt and less than $1,149,525 in secured debt. Unsecured debt is any debt that is not supported by an asset. For example, credit card or medical debt.
The advantages to Chapter 13 are that you do not necessarily need to liquidate your assets in order to pay off your debts. Instead, the trustee will create a three-to five-year payment plan for you. Usually, you only need to pay back a certain percentage of your debt. For example, you may only have to pay 40 cents for every dollar that you owe.
Chapter 11 is very similar to Chapter 13. The main difference is that it is primarily for individuals who owe an exorbitant amount of money—more than the unsecured and secured debt limits of Chapter 13.
Finding yourself on the brink of bankruptcy can be a intimidating. You need to be able to understand the type of bankruptcy you are permitted to file, be present at all court hearings, and fill out a lot of paperwork. For example, you will have to list all of your assets and debts, show proof of your financial affairs, and list your current expenditures.
Individuals can choose to represent themselves without an attorney in a bankruptcy case. However, this can be quite difficult. It is unlikely that the person has been through the process before. Therefore, it can be challenging to handle everything correctly. Any form that is filled out wrongly, if a deadlines is missed, or the debtor forgets to pay certain fees, then the case may be thrown out. According to the U.S. Courts bankruptcy resource, “Bankruptcy has long-term financial and legal consequences—hiring a competent attorney is strongly recommended.”
Filing for personal bankruptcy can be a complex and confusing process. Having an attorney to assist with the paperwork and any other questions you may have can be very helpful. Many experts recommend that you hire an attorney. According to New York City attorney, Andrea Fisher, “If you truly need to file bankruptcy, you truly need to hire an attorney. The bankruptcy code is filled with procedures and rules. Just filling out the petition, which is the forms you file to start the bankruptcy process, is very complicated.”
Using an attorney
Hiring an attorney who specializes in bankruptcy cases can save you both time and money. Almost half of all Americans who file for bankruptcy try to navigate the confusing process of court meetings and legal paperwork on their own, often with disappointing outcomes. Attorneys who have had years of education and training are aware of the complex bankruptcy laws and are here to help.
Purchasing a legal plan is a great way to help manage the stress, costs, and time involved in settling a bankruptcy case. Group plans, purchased through your employer, provides employees with access to a qualified network of attorneys, phone or office meetings, and quality customer service.
The costs of a legal plan are relatively inexpensive, even if you only utilize the services one time in a single year. In a group legal plan, you only have to pay a small monthly fee. So, if you are ever concerned about your finances. Or you have found yourself facing bankruptcy, rest assured that you will receive quality help through your legal plan service.
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