Bankruptcy basics

Personal bankruptcy generally is considered the debt management tool of last resort because the results are long-lasting and far-reaching.

A bankruptcy stays on your credit report for 10 years, making it difficult to acquire credit, buy a home, get life insurance or sometimes get a job. However, it is a legal procedure that offers a fresh start for people who can't satisfy their debts. Individuals who follow the bankruptcy rules receive a discharge — a court order that says they do not have to repay certain debts.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. The current fees for seeking bankruptcy relief are $160, consisting of a $130 filing fee and a $30 administrative fee. Attorney fees are additional and can vary widely.

Chapter 13 allows you — if you have a regular income and limited debt — to keep property that you otherwise might lose, such as a mortgaged house or car. In Chapter 13, the court approves a repayment plan that allows you to pay off a default during a period of three to five years, rather than surrender any property.

Chapter 7, known as straight bankruptcy, involves liquidating all assets that are not exempt. Exempt property may include cars, work-related tools and basic household furnishings. Some property may be sold by a court-appointed official — a trustee — or turned over to creditors. You can receive a discharge of your debts under Chapter 7 only once every six years.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs and debt collection activities. Both also provide exemptions that allow you to keep certain assets. Personal bankruptcy usually does not erase child support, alimony, fines, taxes and some student loan obligations.

Next week: Avoiding Scams

Turning to a business that offers help in solving debt problems may seem like a reasonable solution when your bills become unmanageable. Be cautious.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at [email protected]

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