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If you’re receiving a seemingly endless number of calls and letters from debt collectors, filing for bankruptcy may look like a good option. Since a bankruptcy can stay on your credit report for 10 years, it’s best to know the basics before you decide to file.

Types of bankruptcies

There are two types of individual bankruptcy options to consider — Chapters 7 and 13.

If your goal is to pay off as much outstanding debt as you can, then wipe away the rest, Chapter 7 may be an option. Chapter 7 bankruptcy liquidates all non-exempt property (e.g., boats, second vehicles, vacation homes) that can be sold to repay unsecured debt (e.g., credit cards, personal loans and medical bills). The money received will be used to clear your outstanding debt. Personal debts such as taxes, outstanding alimony and child support, and student loans will not be wiped away in a bankruptcy proceeding.

Exempt property is the things that are necessary for day-to-day life, such as your house and car. Retirement accounts, pension plans, alimony and child support payments are automatically exempt from collection efforts to repay your debt. But what if you have secured assets (e.g., car or boat)? You can request a reaffirmation of the debt — essentially a request to keep your assets — from the bankruptcy court as long as you are not past due on the loan payments. The monthly payments for reaffirmed debts will continue as if you never filed for bankruptcy.

To be considered for Chapter 7 bankruptcy, you’ll have to pass the "means test." In North Carolina, you automatically pass this test if you have a current monthly income less than the state’s median income guidelines. If your income is more than the state’s median income guidelines, you may still qualify for Chapter 7 by going through an extended means test.

This extended test takes into consideration your income and expenses to determine if you have enough disposable income to repay your debts without having to file for bankruptcy. Disposable income is the money left over for spending and saving after you’ve met your monthly financial obligations like alimony or car payments. The higher your disposable income, the less likely you may be eligible for Chapter 7 bankruptcy. If you fail the means test, you may want to consider Chapter 13 bankruptcy.

Chapter 13 bankruptcy is sometimes called "reorganization." Unlike Chapter 7, a primary reason to consider Chapter 13 bankruptcy is the built-in safeguard against foreclosure on assets like your home or car. Under Chapter 13, you will have more time to reorganize payments and get current on loans secured with collateral like your home or car.

Over a period of three- to five years, you’ll work with a bankruptcy court-assigned trustee to repay what you owe. There is no means test with Chapter 13, but you must have enough disposable income — an amount determined by the court — that will allow you to cover expenses like a mortgage and payments on a collection plan.

What you need to do to file bankruptcy

The decision to file for bankruptcy should not be taken lightly. Bankruptcy is not intended to be a quick fix to improve your credit due to delinquencies. If you decide bankruptcy is the course of action you need to take, hire a bankruptcy attorney; the process is very complicated. Even though the attorney will charge a fee for services, it’s not recommended you navigate the process on your own.

Be sure to gather all the documentation that details your debts, income, expenses and financial transactions. You will also need to list all of your property. The attorney will need all the facts to help you.

If you go forward with a bankruptcy, the attorney will help you download the official bankruptcy forms from the United States Courts website and fill them out. The attorney can also guide you through the filing process with the appropriate bankruptcy court in your area. The attorney will coordinate payment of a filing fee or submit a request for a fee waiver on your behalf.

You’ll need to take an approved credit counseling course and a debt reduction course. The bankruptcy court in your area can supply an approved list of course providers.

If you want to find money in your budget to pay down debt before you file for bankruptcy, your Credit Union can help with Financial Counseling. Call or visit your local branch to get started.

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