Bankruptcy is the legal process whereby a borrower formally declares he cannot meet his debt obligations and needs the court system to negotiate a resolution with his creditors. Bankruptcy is an extremely serious matter that will often affect an individual’s financial activity for the rest of his life. It should be used only as a last resort.

Photo: dsimmons2006

Bankruptcy should never be considered a favorable means of credit or debt management. There are several forms of bankruptcy. The two most common forms of personal bankruptcy are the Wage Earner Plan and Straight Bankruptcy.The Wage Earner Plan is established under Chapter 13 of the U.S. Bankruptcy Code. In this type of bankruptcy, the borrower’s debts are restructured into a repayment schedule that is more compatible with his ability to pay.

Creditors will usually accept such an arrangement if:

• The debt will be paid off in three to five years
• The debtor has a steady source of income
• The amount of secured debt is less than $750,000 and the amount of unsecured debt is less than $250,000

Under a Chapter 13 bankruptcy, interest and late-payment penalties are waived. The debtor makes payments to the court, which then pays the creditors.

In addition, the debtor is able to retain the use of and title to all of his assets. A Straight bankruptcy occurs under Chapter 7 of the U.S. Bankruptcy Code. This form of bankruptcy provides the debtor a “fresh start.” Most consumer bankruptcies are filed under this form. It is important to note that not all of a debtor’s obligations are eliminated through a Chapter 7 bankruptcy.

Photo: violet.blue

Among other things, a debtor is still responsible for child support and alimony payments, student and government loans, unpaid income tax liabilities, and income tax withholding and FICA obligations for employees. It is also important to note that a debtor loses control of most, but not all, of his assets under a Chapter 7 bankruptcy. In general, a debtor can maintain control of his personal residence (subject to limitations), his pension or retirement benefits, a nominal amount of personal property, and certain Social Security and disability payments. Another form of bankruptcy has only recently become available to consumers. Bankruptcy under Chapter 11 of the U.S. Bankruptcy Code had traditionally been reserved for businesses.

However, recent court rulings have made it available to individuals who qualify. In general, Chapter 11 would be appropriate for individuals who do not qualify under Chapter 13, either because their debt exceeds the limitations or they have no steady source of income, but nevertheless want to restructure their debt. Under a Chapter 11 bankruptcy, the creditors must approve the reorganization plan.

Source: Personal loan Information : Auto loan, Home loan, Internet bank, Mortgage