THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Monday, July 18, 1994 TAG: 9407160149
SECTION: BUSINESS WEEKLY PAGE: 9 EDITION: FINAL
SOURCE: SPECIAL TO BUSINESS WEEKLY
LENGTH: Medium: 78 lines
Declaring personal bankruptcy will allow you to rid yourself of most debt - but it won't free you from all financial responsibilities.
Before you decide to file, take the time to understand the bankruptcy process and thoroughly review your options under the bankruptcy code. This will help you measure the impact of such a filing on your current and future financial standing.
To begin the bankruptcy process, an individual files a petition in bankruptcy court. The filer will need to complete papers with information on the amount of debt, assets, income and other relevant data.
Filers should make sure these papers are as complete as possible. A debt that is not listed cannot be discharged, and failure to identify assets can be cause for dismissing the case.
Once a bankruptcy petition is filed, a court order will prevent creditors from taking action against the individual.
Bankruptcy options: Federal law gives you several personal bankruptcy options. The type of option an individual chooses depends on income, the type of property owned and the type of debts held.
The two most common filings are Chapter 7 and Chapter 13.
If an individual has a large debt and little or no steady income, filing a Chapter 7 can offer a quick route back to a sound financial footing. However, it's not without its consequences.
For starters, once individuals file for Chapter 7, they lose control of their assets. A court-appointed trustee is responsible for disposing of their property and using the proceeds to pay back as much of their debt as possible.
Under Chapter 7, any debt that is not paid off is usually discharged. The individual never has to pay it back.
Certain property is exempt - meaning it cannot be used to pay creditors. These include:
$7,500 in home equity.
Up to $1,200 in car equity.
Household goods, such as appliances, worth less than $200 each.
$400 in other assets.
These exemptions are doubled for couples who file joint tax returns.
In addition, creditors cannot tap into your life insurance policies, nor can they usually touch accrued pension benefits.
Chapter 13, on the other hand, requires bankruptcy filers to reorganize their debts and pay off some or all of their bills over three to five years. During this time, creditors are barred from taking any action. Also, Chapter 13 filers are not required to sell property to pay off debts.
Filing under Chapter 13, sometimes called a wage-earner's plan, is designed for those who have regular income but are unable to make full payment on their bills. The option is limited to filers who owe $100,000 or less in unsecured debts or $350,000 or less in secured debt.
Keep in mind that neither bankruptcy chapter discharges certain debts, including alimony, child support, federal income takes and some student loans.
The aftermath: Life after bankruptcy means living without credit for a while. Though a bankruptcy filing will remain on an individual's credit record for 10 years, he or she can usually obtain some form of credit within a few years.
Even so, banks may charge such individuals a higher interest rate or require them to have a co-signer for a loan or line of credit. For a while, these individuals will still be considered high risks.
If you decide to declare bankruptcy, you should establish a realistic budget for your family immediately after you file.
Make sure your budget allows you to set up an emergency fund equal to about a year's worth of living expenses. Such a move may help prevent another bankruptcy filing. MEMO: Your Money provides advice on investing and personal finance. The
Virginia Society of Certified Public Accountants produced this column.
KEYWORDS: BANKRUPTCY by CNB