Red Zone Debt
The Bankruptcy Option

The bankruptcy option may be your Hail Mary play for Red Zone debt.

There may be a time when you have debts beyond your means to repay and a credit counseling firm is not able to develop a plan to assist you in dealing with your creditors, and/or collection companies are threatening legal action. 

In that case, this option may be a solution. Bankruptcy laws date back long into our country's history dating back its first enactment in 1800.  

It was originally developed to give creditors the ability to force debtors into liquidating assets to repay debt. Today, it  is designed to give debtors the chance for a fresh start by developing a manageable repayment plan, or liquidating their assets to repay their creditors and having their debts discharged. 

Managing debt in bankruptcy is done through set of rules based upon the US Bankruptcy Code within a Bankruptcy Court System.  This code has been modified many times over the years and at times has been abused. 

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) of 2005 was enacted into law to stop this abuse; it is now much harder to simply walk away from compiled debt.

Typically for consumers, there are two kinds of bankruptcy, Chapter 13 or Chapter 7. 

Bankruptcy Rules:

1. Before doing anything, review Bankruptcy Basics to understand what's involved.

2. Review this Federal Trade Commission information.

2. Consider all your options before turning to bankruptcy. This option may have negative long term repercussions.

3. Although you are not required to have an attorney, always rely on legal counsel when considering or filing for bankruptcy. The penalties for improper filing may be severe.

Briefly, Chapter 7 can be thought of our "grandparent's" bankruptcy. A trustee is appointed by the court. Your assets are placed into an estate controlled by government regulation. The assets are liquidated by the trustee and creditors are paid to extent of proceeds in the estate. Once all the proceeds are paid out the debtor receives a discharge eliminating any balance of debt.

Along with BAPCA, came restrictions (means testing) on who is able to file Chapter7.

According to Bankruptcy Basics published by Bankruptcy Judges Division, Administrative Office of the United States Courts(November 2011, revised Third Edition)  "If such a debtor's income is in excess of certain thresholds, the debtor may not be eligible for chapter 7 relief" and must therefore file Chapter 13.

Chapter 13, "entitled Adjustment of Debts of an Individual With Regular Income, is designed for an individual debtor who has a regular source of income." (See Bankruptcy Basics)  Chapter 13 allows the debtor to keep some assets and develop a repayment plan to repay debts over a three to five year period.

As you can see, bankruptcy is be very complicated and should not be considered without the assistance of legal counsel. Be sure to check into information published by the Federal Trade Commission for more complete information before making any decisions.

Go back to Managing Debt from the Bankruptcy for more options.

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