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Cheat Sheet

Personal Bankruptcy Laws For Dummies

From Personal Bankruptcy Laws For Dummies, 2nd Edition by James P. Caher, John M. Caher

Going through the process of filing personal bankruptcy isn't fun, but it’s sometimes necessary and can be a huge relief. Filing for personal bankruptcy means you have to answer some tough questions about your finances; consider your situation in light of the new bankruptcy law; figure out which bills to continue paying; and probably deal with debt collectors.

What the Newest Bankruptcy Law Means to You

The bankruptcy law that went into effect in 2005 makes it harder than it used to be to declare personal bankruptcy. It's much more difficult to liquidate your assets and get a fresh start to your credit history. It also means that there's a slim chance (less than 3 percent) that you may not be eligible for bankruptcy.

The newest bankruptcy law also lays out the following rules:

  • Mandatory credit counseling within 180 days before filing bankruptcy

  • Pay stubs received within 60 days prior to bankruptcy must be filed with the court.

  • Creditors are entitled to a copy of most recent tax return

  • Mandatory attendance at a financial management class after filing bankruptcy

  • Increased attorney fees and court filing fees

Questions to Answer when Considering Personal Bankruptcy

If you're thinking about personal bankruptcy, you're looking at some hard questions and harder choices, especially under the newest bankruptcy law. Answer the questions in the following list to figure out whether you should consider bankruptcy and what type:

  1. Can you pay off your debts (except mortgages) within three years while maintaining an objectively tolerable standard of living?

    YES: Congratulations! You're probably on fairly solid financial footing.

    NO: Consider bankruptcy. Depending on your circumstances, your options may be

    1. Chapter 7, in which many of your debts are forgiven immediately and you surrender nonexempt property (96 percent of filers don't lose any of their assets).

    2. Chapter 13, where you pay a portion of your debts over three to five years.

  2. Is your median income greater than the median income for your state?

    YES: Your repayment plan must run for five years if you go the Chapter 13 route. Your Chapter 7 may be dismissed if your debts are primarily consumer debts and you flunk the Means Test (see Step 5).

    NO: You automatically pass the Means Test. If you choose Chapter 13, your repayment plan can span only three years. The five-year repayment plan is not required (meaning that you're not get stuck committing all of your disposable income to a repayment plan for five years).

  3. Do you have nonexempt property that you want to keep? Do you need time to catch up on your mortgage? Do you owe taxes or support obligations that you want to pay off over time without being hassled?

    It varies by state, but generally homesteads, pensions, cars, and household goods are exempt.

    YES: Consider Chapter 13 bankruptcy. If your income is greater than the median, you have to pay for five years. Otherwise, a three-plan is an option.

    NO: Consider Chapter 7 bankruptcy.

  4. Are your debts primarily consumer debts and your income greater than the median?

    YES: Take the Means Test, outlined in Step 5.

    NO: Choose either Chapter 7 or Chapter 13 — whichever is more beneficial to you. See Chapter 4.

  5. Do you pass the Means Test?

    Deduct the following monthly expenses from your gross monthly income:

    1. IRS living, housing, and transportation expenses (excluding mortgage and car payments)

    2. Mandatory payroll deductions (taxes, FICA, and repayments on pension loan) and future support obligations

    3. Health insurance premiums

    4. Debt payments, such as regular mortgage and car payments, 1/60 of past due mortgage and car payments, and 1/60 of past due support obligations

  6. Is the difference between your monthly expenses and gross monthly income less than $100? (If the difference is more, proceed to Step 7.)

    YES: You pass the Means Test and may choose between Chapter 7 and Chapter 13.

    NO: You may be restricted to Chapter 13.

  7. Is the difference between your monthly expenses and gross monthly income between $100 and $166.66 per month and less than 25 percent of your unsecured nonpriority debts (regular obligations such as credit cards and medical bills divided by 60)?

    YES: You pass the Means Test.

    NO: You're limited to Chapter 13.

  8. Is the difference between your monthly expenses and gross monthly income more than $166.67 per month?

    YES: You're limited to Chapter 13.

    NO: Choose between Chapter 7 or Chapter 13 — whichever is more beneficial to you.

What Bills to Pay First when Considering Personal Bankruptcy

If filing for personal bankruptcy is on your radar, continue paying whatever bills you can to stay within the law. Prioritize bill payments with the help of this list:

  • Rent (unless you plan to move)

  • Utilities

  • Car (if you want to keep it)

  • Mortgage (if you want to keep your home)

  • Fines

  • Child support and spousal support

  • Income taxes

How to Deal with Debt Collectors during Personal Bankruptcy

If you're facing personal bankruptcy, you've probably heard from debt collectors. A debt collector's job is to get you to pay their client's debt, and they can be very inventive in finding ways to motivate you to do that. Debt collectors, however, are bound by laws, just as you are. What debt collectors can't do include the following:

  • Call you early in the morning, late at night, or at any other unreasonable time or place.

  • Harass you.

  • Contact you at work if your employer prohibits personal calls.

  • Threaten you.

  • Tell anyone (other than your spouse, lawyer, or cosigner) that you're in debt.

  • Bug you once you've told them to bug off.

If a debt collector breaks the rules, you have options: First, tell them you know what the Fair Debt Collection Practices Act is and how to use it. Then, use it by filing a complaint with the Federal Trade Commission, Correspondence Branch, 600 Pennsylvania NW, Washington, D.C., 20580.

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