Personal bankruptcy is a legal action that allows an individual to avoid paying creditors either permanently or temporarily. The Constitution of the United States allows this and Congress enacted the Bankruptcy Code in 1978. Amendments, made periodically over the years, led to the Bankruptcy Abuse Prevention & Consumer Protection Act (BAPCPA) of October 2005.

Chapters, Documents and Fees

Preparation must be thorough before a filing can take place. The initial requirement for credit counseling is that completion occur in the 180 days previous to bankruptcy filing. During this time, begin to collect and organize paperwork. You need copies of tax returns filed over the past three years, as well as hard copies of the most recent bills from your creditors. Gather four recent pay stubs and draw up the income and expense sheet to accompany your bankruptcy petition. There are four chapters dealing with the bankruptcy code, and each has its own level of fees. Those chapters are 7, 11, 12 and 13, with the most common choices being chapter 7 and chapter 13. Only the individual with extraordinary debt level might consider using chapter 11. Chapter 12 is reserved for the farmers. Note that chapters 11 and 12 are very rarely used. When your debt load exceeds any reasonable, legal payback solution, you will file under chapter 7, the "liquidation" chapter. Individuals filing under this chapter rarely have assets to liquidate. Currently, the total fee is $200 and covers a filing fee of $155, a trustee fee of $15 and a miscellaneous fee of $30. Chapter 13, the "reorganization" chapter, is less costly ($185) than chapter 7. It involves restructuring your personal finances. This chapter requires the preparation of a repayment proposal to be filed with the remainder of your documents. A repayment plan could offer 10 percent to 100 percent of the outstanding balance. It might change the amount you pay each creditor and spread payments over three to five years. The excluded amount becomes dischargeable debt. The debtor must participate in a debt education course that provides a certificate of completion. This requirement helps eliminate those who would exploit the law purely to escape debt obligations. When you finish making consistent monthly payments and present the signed certificate, the court will dismiss the dischargeable debt.

Going it Alone

BAPCPA is a federally guaranteed right to start fresh, free from the burdens of heavy debt. When bankruptcy relief is granted, you will be able to start life, business and/or employment with a clean slate. Collectors must stop all attempts to make contact when their sole purpose is to collect money. This part of the law tends to appeal to the person considering bankruptcy. Much of the time preparation to file will be spent on research. It is a benefit to be very familiar with bankruptcy laws and its various chapters. Just as important is the presentation technique and your knowledge of the overall process. Filing for personal bankruptcy involves a pattern of actions encompassing education, research, documentation and presentation. Since this is a legal procedure, it is important that you support statements that you make on the filing papers. The best method is to provide hard copy evidence. You must present 2-3 years of income tax returns, current invoices showing unsecured debt load (credit cards, personal loans) and each minimum monthly payment. Bankruptcy is a legal procedure presented in a court of law. Failure to divulge all support information is a punishable offense. You must show your rent, mortgage and vehicle secured loan commitments along with your daily living expenses. This would include recent utility bills and your best estimate of miscellaneous living expenses. To show that your filing is a valid request, show proof of your income from all sources. You need cash to pay the fees to file the necessary documents. While you can prepare and file on your own, this is one time it would be prudent to seek professional representation---in this case, a bankruptcy attorney. Although this will cost you a few dollars, you stand to recoup it with peace of mind. Weigh the costs and benefits before you proceed on your own.

Alternatives

Bankruptcy may not always be the best solution to financial troubles, especially since it impacts your purchasing power, employment, future credit and housing. It follows you around for seven to ten years. Before proceeding to court, it is important to consider the alternatives to bankruptcy. The first consideration is an out-of-court settlement for a lower payment amount. You would be wise to rely on a qualified legal professional, as negotiations of this nature are fragile. Debt counseling is another good option, which is a preliminary requirement for filing bankruptcy. Counselors are usually able to lower payments with reduction in interest rate. A creditors is usually resistant to debt forgiveness, but the right person can be very convincing. Finally, if you are a homeowner, consider debt consolidation - if you have any equity in your home. If this is the route you choose, spend time and carefully consider this option. Placing the burden of your total debt on the house where you live could eventually cause bigger problems. In the event you cannot make the payments for either mortgage or equity loan---or both, you could be homeless.

Source:

Personal Bankruptcy

America's Bankruptcy Courts: Long Term Effects

Bankruptcy Protection

More Information:

FTC Facts For Consumers: Before You File for Personal Bankruptcy

Should I File Bankruptcy?