Under the protection of a bankruptcy court, the federal courts have a process called bankruptcy that helps people and businesses get rid of their debts and figure out how to pay them back. Reorganization and liquidation are the two types of bankruptcy.
Liquidation is a type of bankruptcy in which you ask the court to take care of your debts for you. Some of your assets are sold by the court, and the money from that goes to pay off your debts. The liquidation process only takes four to six months, and most people only have to go to court once.
Not everyone can choose to go bankrupt. If you've gone through bankruptcy in the last six to eight years, you can't apply. Also, you won't qualify if, after looking at your debts, income, and spending, it's decided that another type of bankruptcy would be better for you. Most of the time, disabled veterans who racked up debts while in the military will be able to file. In the same way, if your business is the cause of your debts, you can also file for liquidation. If you don't fit into these groups, you must meet certain requirements.
One of these things is that your income for the six months before you file will be compared to the median income of other families in your area with the same number of people. If, after doing the math, it looks like your income is enough to pay for other bankruptcy proceedings, even with the expenses that are allowed, liquidation will not be allowed. This amount does not include payments from Social Security.
Most people like the type of bankruptcy called "liquidation." This is because the court will usually let you keep some of your things so that you won't be completely broke after the case is over. This kind of legal flexibility makes it possible for a person to start over with their "financial life" without losing everything. Plus, it gives back at least some of the money that was owed to creditors.
Reorganization is the other type of bankruptcy. This is when you tell the court how much you plan to pay your creditors to get out of debt. Usually, this is part of a plan for the next 3–5 years. If you keep up with your payments, you may be able to get out of any debts you still have. A court will sometimes look at a person's finances and even set them free before the plan is done.
If you do want to file for bankruptcy, you will also have to get credit counselling from an agency that is known and trusted. During this time, you will be asked to look closely at your finances and decide if you really need to file for bankruptcy. By doing this, you can better figure out if you missed any good ways to make deals with your creditors and possibly avoid the more serious step of filing for bankruptcy.
No matter what happens, you will still have to go to counselling after you file for bankruptcy. The goal is to make sure you don't let your money get out of hand in the future.
