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Bankruptcy:
Bankruptcy is a federal court process that helps individuals and businesses repay their debts under the protection of the bankruptcy court or wipe their debts out altogether. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made major changes to bankruptcy law, making it more difficult for some people to erase debts by filing for bankruptcy. These changes were prompted by years of complaints by banks and other financial institutions who believed that the bankruptcy laws had been abused by many consumers.
There are two basic types of bankruptcies that apply to most individuals: reorganization (Chapter 13) or liquidation (Chapter 7).
Chapter 13
In a reorganization bankruptcy, you are required to file a repayment proposal with the bankruptcy court. Some debts must be repaid in full, some are repaid as a percentage of the original debt, and others aren't repaid at all. In general, Chapter 13 requires you to pay back your secured debt and as much of your unsecured debt as possible. Payment plans usually cover a five year period. During the repayment period, the court will place restrictions on how you can spend money. In many cases, a set amount will be garnished from your wages and a trustee of the court will make the payments to your creditors.
Chapter 7
In a liquidation bankruptcy, you must turn their personal property (with a few exceptions) over to the court, which sells it and uses the proceeds to pay all your debts or a portion of your debts. Chapter 7 has generally been the most common form of bankruptcy filing for those people who have no assets to lose and therefore are seeking a "fresh start." However, recent changes in bankruptcy law have made this type of filing much more difficult.
Mandatory Credit Counseling
The new bankruptcy law requires that anyone who files bankruptcy must received credit counseling and financial education by government-approved programs as a condition for filing bankruptcy and discharging debts. (See What is Credit Counseling? for more information about their programs) No one can file bankruptcy unless they complete an accredited credit counseling program within 180 days of their bankruptcy filings.
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