Categories: Finance

How Does Bankruptcy Work?

You know that we are in tough economic times when people can’t even afford to file for bankruptcy.  According to CNN Money, it is estimated that upwards of 1 million people this year will need to file for bankruptcy, and will need to use their tax return to do it.  This is incredibly sad.  While the average cost to file personal bankruptcy is around $1500, the question is, “What does that $1500 actually buy you?”  I realize it buys you bankruptcy, but what exactly is bankruptcy?  When you pay someone $1500, let’s say, what are they really doing on your behalf?  This article will answer those questions.

Why Are the Fees So High?

Well, obviously, unless you find someone to do it for free or do it yourself, you will need to hire someone, probably a lawyer, to do it for you.  Not only is the lawyer going to want to be paid, but there are fees associated simply with filing the paperwork.  It also doesn’t help that in 2005 the government passed the Bankruptcy Abuse Prevention and Consumer Protection Act to help reduce the number of bankruptcies.  While the Act only reduced bankruptcies by .1%, it has certainly made the process of filing bankruptcy more tedious and time consuming which also factors in to the overall cost.

What Exactly is Bankruptcy?

Bankruptcy is a legal process whereby individuals, who are in deep in debt, can gain a “fresh start” by either eliminating their debts or repaying them in a manageable way.  Bankruptcy, thus, falls into two categories: liquidation and reorganization.

Chapter 7 bankruptcy is the most common type of liquidation bankruptcy.  With Chapter 7 bankruptcy, your assets can be liquidated to pay some or all your debts.  This is common for folks who have a lot of unsecured debt.  However, debts like child support and tax-related debt are usually not able to be considered for bankruptcy.

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In Chapter 13 bankruptcy, you are basically setting up a payment plan to pay back your creditors to some extent.  The amount of the payment and the term of the payback period are determined by factors such as how much you earn, how much you owe, etc.  Typically, you also stop accruing interest under this plan.

What Does a Bankruptcy Lawyer Do?

First of all, I want to encourage you to hire a bankruptcy lawyer as opposed to filing bankruptcy yourself.  There are too many things that you do in error, and, if your file is rejected due to errors, it will still adversely affect your credit.  The first thing a good bankruptcy lawyer should do is sit down with you and determine not only if you are a good candidate for bankruptcy, but what kind of bankruptcy is best suited for your situation.  The bankruptcy lawyer will understand the laws of your state, and be able to present your bankruptcy case to the judge.  Going with you to creditor meetings, and filing your paperwork are other tasks that the bankruptcy lawyer will most certainly handle.

Mr. Jones writes on behalf of bankruptcy lawyers like https://jmbklawfirm.com/

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