Bankruptcy Law Some Important Facts
Below is a MRR and PLR article in category Finance -> subcategory Personal Finance.
Understanding Bankruptcy Law: Essential Insights
Overview
Seeking loans, credit cards, and other forms of credit has become more accessible, leading to a significant increase in bankruptcy rates in the United States. Between 1994 and 2004, these rates nearly doubled. In response, the government implemented new laws to ensure that bankruptcy filings were justified.
Key Legislative Changes
A pivotal piece of legislation regarding bankruptcy is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2004, which came into effect in October 2005. This law has introduced significant changes:
1. Stricter Chapter 7 Qualifications: The act makes it harder to qualify for Chapter 7 or complete bankruptcy and imposes tighter budgets on Chapter 13 debtors.
2. Tax Return Requirements: Debtors must have filed tax returns for four consecutive years to be eligible.
3. Dischargeable Debts: Obtaining relief from dischargeable debts is more challenging, as debtors must provide valid reasons for debt discharge.
Types of Bankruptcy
Chapter 13 Bankruptcy
This type allows debtors to retain some assets by proving limited debt and a steady income. It is suitable for those with significant financial issues but with the means to repay certain debts. The court establishes a repayment plan to clear obligations like mortgages or car loans over three to five years.
Chapter 7 Bankruptcy
If repayment is not feasible, Chapter 7 involves liquidation of assets, except for exempt items deemed necessary by the court, such as a primary vehicle. The court categorizes debts into non-dischargeable and dischargeable:
- Non-Dischargeable Debts: Can be due to wrongful conduct (e.g., theft, fraud) or public policy (e.g., child support, court judgments).
Ongoing Responsibilities
Even after filing for bankruptcy, individuals are generally required to pay taxes, student loans, alimony, child support, and court fees. These obligations remain, even under Chapter 7, often misleadingly termed as "a fresh start."
Impact on Credit
A bankruptcy filing remains on an individual’s credit report for around ten years, complicating the prospects of acquiring new credit, such as car loans or mortgages. While some creditors might offer limited credit, high-interest rates can hinder financial recovery.
Co-signers and Liability
It's crucial to remember that co-signers are also liable for debt payments. If someone co-signed a loan, they could be drawn into bankruptcy proceedings, possibly affecting relationships with family and friends.
Seeking Professional Advice
For personalized advice, it's advisable to consult a bankruptcy attorney or legal aide in your state, as laws can differ by jurisdiction.
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