WHAT IS BANKRUPTCY?

CHAPTER 7 BANKRUPTCY?
Often called a straight bankruptcy, Chapter 7 is a liquidation proceeding. The debtor turns over all non-exempt property to a bankruptcy trustee. The trustee then converts it to cash and distributes this money to the creditors. It typically takes about four months and all debts are wiped out. Usually individuals filing for Chapter 7 do not have many assets to lose, so Chapter 7 offers a completely fresh start.

WHAT ARE THE REASONS SOMEONE WOULD FILE CHAPTER 7?
Unemployment, medical expenses and other unexpected large expenses are common reasons for Chapter 7. However, overextended credit and marital problems can lead to Chapter 7 as well if they are serious enough.

CHAPTER 13 BANKRUPTCY?
This is also known as a reorganization bankruptcy. Chapter 13 is designed to have the debtor pay off the debt they have accrued while offering protection from further interest charges and fees. Typically filers pay for a three to five year period and whatever debt is left over is generally erased. An advantage of Chapter 13 is that it allows you to keep your non-exempt property; however, steady income is needed to not only cover general expenses, but put money towards paying down the debt. A person can file Chapter 13 if they live in or have a place of business in the United States, have a steady income and on the date they file the bankruptcy petition owe less than $307,675 in unsecured debts and less than $922,975 in secured debts. These amounts are 2001 amounts and are adjusted each year. Chapter 13 is not an option for corporations and partnerships, and you cannot file a Chapter 13 if a prior petition you filed was dismissed in the last 180 days.

HOW DO I KNOW WHICH ONE TO FILE?
The new bankruptcy law applies the "Means Test" to your income and expenses to determine which chapter of bankruptcy you are eligible to file; 7 or 13. The Means Test is aimed at determining if you have ‘the means’ to pay back any portion of your debt, thus requiring you to file for Chapter 13. As you proceed through the tutorial and budget process of this site, we will conduct the Means Test with the information you provide.

The Means Test works in the following way:
If you make under the median income for your state, you may be eligible to file Chapter 7.
If you make over the median income for your state, the test will deduct IRS allowable expenses and then figure the total amount of money you can contribute to your debt over a five year period.

If this total amount is under $6,000, you may br eligible to file Chapter 7
If it is over $10,000, you must file Chapter 13
If it is between $6,000 and $10,000, you may only be eligible file Chapter 7 if this amount is less than 25% of your total, unsecured debt.

How to recover....
Nothing in credit is "forever." A bankruptcy legally can remain on your credit report for up to 10 years, but its effect on your credit score can start to diminish the day your case is closed -- if you adopt responsible credit habits such as paying your bills on time, using only a small portion of your available credit and not applying for too much credit at once.

You have to get and use credit to build your credit score.
Living on a cash-only basis may be a smart choice for those who really can't handle credit. But if you want to rebuild your credit score, you can't sit on the sidelines.

Get a secured credit card
You need two types of credit to quickly rebuild your credit score:

Installment: auto loans, student loans or mortgages
Revolving: credit cards or home equity lines of credit

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