Life is not always smooth. Lots of unexpected events may cause financial problems in the most stable of families. A job loss, a family member's illness, a divorce - many events can push a family into the financial abyss and leave even the most financially conservative person drowning in debt. Most families in the U.S. today carry some debt. Late payment penalties and high interest rates can quickly drive up the outstanding balance on your credit cards.

Types of Bankruptcy

Most individuals may file either a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, also known as a "wage earner's" plan. A trustee is appointed by the court to take over your property.

In a Chapter 7, any property you own which is not "exempt" must be sold to pay off your creditors. You may keep certain property that is of limited value. In Georgia, for example, you are allowed to keep $10,000.00 worth of equity in your home. If you and your spouse file a Chapter 7, you are allowed to keep $20,000 worth of equity in your home. You may keep your vehicle if you have no more than $3,500.00 worth of interest in the car. You are allowed to keep $5,000.00 worth of household items and other small things specifically allowed under Georgia law.

A Chapter 7 is mostly used to discharge or get rid of "unsecured" debt such as credit card debt and medical expenses. A Chapter 7 will not help you discharge "secured" debt where a creditor has a "lien" on your property, such as a home mortgage or a car loan. If you are behind on your payments for secured property, the creditor will still have the right to take back the property (with the Bankruptcy Court's permission) even though you have filed a Chapter 7. If you are current on your secured debt, you may simply ask the court to allow you to continue paying the debt.

Once you have received a discharge of your debts in a Chapter 7 bankruptcy, you may not file another one within 8 years and certain debts are not dischargeable in a bankruptcy; namely, most student loans, most taxes, child support, alimony, court fines and criminal restitution and personal injury caused by driving drunk or under the influence of drugs.

A Chapter 13 bankruptcy is mainly used by people who have regular sources of income. You would have to pay a portion of your income to your creditors until your debt or a percentage of it has been paid. As in a Chapter 7, a trustee is appointed by the court to handle your property. The advantage of a Chapter 13 is that you would probably be allowed to keep any secured property (like a home or car) where you had fallen behind on the loan so long as you follow the terms of the Chapter 13 payment plan. Generally, creditors receive more money than they would receive from you if you had filed a Chapter 7 bankruptcy. The court must approve your repayment plan.

A Chapter 13 lasts from three to five years, but no longer than five years from the date of filing of the bankruptcy. You must strictly follow the repayment plan. Otherwise, the trustee can ask that your bankruptcy case be dismissed. You cannot borrow money without the court's permission while the Chapter 13 plan is going on. All of your disposable income after your household and living expenses must go towards paying back your creditors. It is difficult for most people to complete a Chapter 13 and many of them are dismissed by the court before the plan is complete.

New Bankruptcy Law

On October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) went into effect. The new law makes major changes to the Bankruptcy Code which make it more difficult for most people to file a Chapter 7 bankruptcy. To file a Chapter 7 bankruptcy, you must not earn more money than the median income for your state and you may not have any money left over after paying eligible household expenses. The amount of your allowed expenses are set by the Internal Revenue Service, not by what you actually spend. Allowed expenses are set at fairly low amount. If you don't qualify for a Chapter 7 bankruptcy, the court may find that you have "abused" the bankruptcy process and your creditors may seek to have your bankruptcy dismissed.

Ninety days before filing a bankruptcy, you must also participate in credit counseling. There is a fee for the credit counseling. A list of approved credit counseling agencies is kept on the U.S. Bankruptcy Court's website. Within 45 days after your creditor's meeting, you must take a debt management course with a credit counseling agency or you will not receive a discharge of your debt.

Alternatives to filing bankruptcy

A bankruptcy is really a last resort for people who are not able to get out of debt any other way and who have income that a creditor may try to take if the creditor goes to court and gets a judgment against them. Many people who are not working and who don't own very many assets should not file for bankruptcy because creditors cannot collect from them. Certain federal sources of income such as social security and SSI may not be taken by creditors. If you are working only part-time and are earning very little income, your wages may not be taken by your creditors. If you are uncertain about whether or not your wages may be taken, you should consult with an attorney.

A bankruptcy will show up on your credit report for a long time. If you are unable to pay your debts because of a short-term financial problem, you may be able to work out a payment plan with your creditor. Some creditors will negotiate with you to accept far less than the amount you owe. Beware of companies that promise to "fix" your credit report. Often they will take your money promising to pay off bills and then do nothing and keep your cash. Even legitimate consumer credit counseling agencies are limited in what they can do. They can't do much with secured debts or interest on student loans. Many times, you can negotiate on your own behalf without having to file a bankruptcy.