On any given day, nearly 8,000 people file bankruptcy through the U.S. Courts Federal Judiciary division. In order to obtain approval debtors must adhere to new bankruptcy laws enacted by Congress in 2005. The Bankruptcy Abuse Prevention and Consumer Protection Act made the process of filing difficult and confusing.
Under BAPCPA, individuals can file bankruptcy without legal representation, but business owners and corporate entities must hire a bankruptcy lawyer. Few people can comply with BAPCPA regulations on their own. Therefore, the first step of filing bankruptcy should involve hiring a lawyer who is well-versed in the new bankruptcy laws.
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One stipulation of BAPCPA is that debtors must undergo credit counseling through an agency approved by the U.S. Trustee. Credit counseling must be completed no more than 180 days prior to petitioning the court. Once counseling is completed, debtors receive a certificate which must be presented to the bankruptcy judge before final approval is granted.
When filing bankruptcy, debtors must undergo the 'means' test to determine the amount of debt they will be required to repay. The new bankruptcy laws require debtors to repay a portion of debts whenever possible.
The means test is a financial tool that compares debtors' income to their states' median income level. If income is equal to or greater than median income levels, debtors will be required to file Chapter 13 and establish a payment plan. If income is less than median income levels, debtors might be allowed to file Chapter 7.
Chapter 7 is often referred to as liquidation bankruptcy because debtors must liquidate assets in order to satisfy outstanding creditor debts. Any remaining balance is discharged and debtors are given a clean financial slate.
Chapter 13 allows debtors to retain assets through the establishment of a payment plan. Chapter 13 payment plans are presented to the bankruptcy judge who will accept, reject, or modify the plan. Once approved, debtors must submit monthly payments to the U.S. Trustee, who in turn submits payments to creditors.
If debtors are unable to adhere to their chapter 13 payment plan, they fail out of bankruptcy. When this occurs, creditors are allowed to petition the court seeking dismissal. If a bankruptcy petition is dismissed debtors lose protection from the court and creditors can commence with collection actions.
Many homeowners file Chapter 13 to avoid foreclosure. While filing for bankruptcy protection can temporarily halt foreclosure proceedings, it may not be the preferred method for saving the home. If debtors fail out of bankruptcy, mortgage lenders can petition for dismissal.
If approved, lenders can commence with foreclosure proceedings at the point where they left off before the automatic stay went into effect. In some cases, homeowners are forced out of their home in a matter of days.
When possible, debtors should seek out bankruptcy alternatives such as debt consolidation, debt settlement or credit counseling. Bankruptcy remains on credit reports for up to ten years, while alternatives affect credit for up to seven years.
If personal bankruptcy is the only option, seek out a qualified attorney to guide you through the process. One resource for locating bankruptcy attorneys is the American Bar Association at abanet.org. Another option is to ask friends and family for a referral. Chances are you know someone who has undergone the process and can refer a good bankruptcy lawyer.
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