April 27, 2017 | By RGR Marketing Blog

What Your Clients Should Know Before Filing for Bankruptcy

Debt is not as inevitable a part of life as death and taxes, but it has definitely taken its place as a part of most contemporary American lives. A certain amount of debt is reasonable and manageable for most of us. Whether we are financing the cost of higher education, a new vehicle, or a home, credit and debt can have their rightful place in a well-balanced, good life.

Unfortunately, there are those among us who aren’t innately skilled with managing personal finances, and slip deeper and deeper into debt until they reach a point where they can’t borrow any further. Around this point, many of them can’t afford to make even the minimum payments on their existing credit accounts.

For them and for the others who slip into debt due to a hardship of some sort, the Federal Government has established legal bankruptcy protection to give them some relief from creditors and their agents.

Bankruptcy law is relatively straightforward and some debtors file for protection without the assistance of an attorney. Others seek the help of lawyers to navigate the world of bankruptcy filings and to represent them in court. Regardless of which camp your clients may fall into, a quick primer on the two main types of bankruptcy protection is worth reading so you can explain the options to them.

Chapter Seven Bankruptcy

Chapter seven is the most common type filed for by individuals (and married couples) in debt. Chapter Seven is a liquidation bankruptcy reserved for those with little or no disposable income. Chapter Thirteen is for those who have more than enough money to get by, but need to reorganize their debts—more on that type of bankruptcy below.

In order to qualify for bankruptcy protection under Chapter Seven, a debtor must file with the court and turn over their nonexempt property to a court-appointed trustee for liquidation, to pay down or pay off the outstanding debts the debtor has incurred.

Houses, cars, and other secured debt may be exempted by the debtor, should they wish to keep paying on those debts. Chapter Seven is typically used by debtors with relatively low incomes, and little or no real assets.

Chapter Thirteen Bankruptcy

As mentioned above, Chapter Thirteen is a reorganization bankruptcy. It is used by debtors with enough regular income to pay back a portion of their debts under a court-approved payment plan.

A Chapter Thirteen bankruptcy allows the debtor to keep all of their property and to pay back only a portion of their unsecured debt. The amount the debtor is required to pay back depends on the type of debts they have, their income, and their expenses.

This type of bankruptcy will also allow a debtor to catch up on late payments for secured debts (house, car, etc.), and will allow them to catch up on debts that cannot be discharged, such as student loans, back child support, etc.

Other Bankruptcy Protections and Additional Options for Debtors

In case your clients may be wondering about chapters one through six and eight through twelve, tell them not to bother. First of all, there are only five types of bankruptcy currently allowed under federal law.

Of these, Chapter Eleven is reserved for businesses looking to reorganize, Chapter Twelve is reserved for farmers, and Chapter Nine is for governments and municipalities. But, there are other ways to cancel, reorganize, or negotiate away some or all of your clients’ debt.

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