There are two main purposes for filing a personal bankruptcy. The first one is to relieve a person from his or her debts where he or she can no longer settle the financial obligations from a creditor or a lender. This is referred to Chapter 7 Bankruptcy which allows debtors to be clean slate or partly discharged of their debt. Second, is to provide a fair process for the creditors. It can be found on Chapter 13 of Bankruptcy wherein debtors pay all or a part of their debt.
The purposes of personal bankruptcy can be accomplished by those two Bankruptcy legal processes of the U.S. constitution (and codified in Title 11 of the US Code). Let’s discuss first about the Chapter 7. Under this chapter, as a debtor you are allowed to be relieved from your debts by using your liquid assets to repay your debts or by giving up a certain property that you own. The liquid assets are personal possession that a debtor may have and can be converted into cash include savings accounts and checking. However, there are liquid assets that are classified depending on the debtor’s state which are exempt assets that cannot be used to repay the creditors. The non exempt liquid assets shall be turned over to the court for proper distribution among creditors as partial repayment for the debts. Debtors are discharged only of their remaining debts after the courts have distributed the non exempt liquid assets to the creditors. Yet you have to pass some standards in order to qualify filing for Chapter 7 Bankruptcy. You must undergo a means test to
prove that the income must be less than the median income in your state for your family size. However, failing the test means that you will not be allowed to file for Chapter 7, but there’s another option for you which is the Chapter 13. Moreover, it is also important to undergo credit counselling aside from passing the means test.
If you should plan to file for Chapter 13, you should know that you are able to repay all or a part of your debt through a repayment plan that has a time span of three to five years. In filing the personal bankruptcy, you must include submitting the repayment plan to the court. You can only start making payments to the courts who then distribute repayments for creditors, after you have submitted the plan. This is a requirement that you should accomplish even if your repayment plan has not been approved yet. You must wait for a few weeks for the hearing to approve the plan, where the Judge has the final say about the amounts you’ll be paying while creditors have no control or object about it. The approval of your repayment plan will signal you that you shall be making payments to the court. You can only be discharged of any remaining debt once you have completed your Chapter 13 payment plan.