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Consolidating Debt Through Bankruptcy Court |
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Submitted by Cheryl Adams
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There comes a time when many people have no choice but to seek bankruptcy protection from their creditors. If going through a debt consolidation specialist does not result in payments low enough to maintain a reasonable standard of living. When debts are overwhelming, bankruptcy through Chapter 7 may be their only alternative.
Many people may prefer to seek protection under Chapter 13 bankruptcy but before a court will approve the plan, it will have to be shown the individual can meet the financial demands of the plan. If a person is unemployed with no appreciable assets, going through a court repayment plan will not be an option. Additionally, if the person’s income is not sufficient to allow for living expenses while paying off their debts, it will also be rejected.
As an example, a person with $30,000 in debt, wanting to enter a Chapter 13 repayment plan for five years, the payments needed to satisfy the plan would be $500 per month. If their monthly income does not account for that amount plus approved living expenses, then the plan will be rejected.
Additionally, some creditors may be reluctant to enter into a loan consolidation plan through a private specialist, but have little choice in bankruptcy courts. However, they do not always agree to erase all charges unless specifically ordered by the court to do so. A person in a Chapter 13 bankruptcy proceeding can also, if they are unable to meet the payment obligations, petition the court for relief through Chapter 7 and liquidating assets to pay part of their debts.
New Bankruptcy laws have been enacted that make the process more labor-intensive and require a more thorough reporting of income and expenses by the debtor. While the basic process remains the same, getting into the court now takes a longer and more circuitous route. In the past, debtors could consult with an attorney and make their own decision on the type of bankruptcy they want to file.
Under the new laws, within six months of filing for bankruptcy the debtor must go through a qualified debt counseling service that provides alternatives to bankruptcy to insure the debtor is making informed decisions of filing for bankruptcy. Additionally, the decision to file Chapter 7 or Chapter 13 bankruptcy is now based on mathematical formulas, to determine if they can make the cut for Chapter 7.
This means test makes the determination based on income, family size and allowable expenses and through a complicated formula determines if the person has to means to pay their debt through Chapter 13 bankruptcy. While the means test may look fair on the surface, there are special circumstances and exceptions to the requirements that each client may be subjected to prior to filing for bankruptcy.
The new laws were designed to steer more people away from Chapter 7 bankruptcy and to Chapter 13 in which their debts will be paid through a court plan. Unfortunately, the new law does not take into consideration many factors that can affect individuals’ finances and does not offer safeguards against potential errors by counseling services. Before considering bankruptcy, consulting with an attorney can help a person make their best decision.
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