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Bankruptcy should be considered an option when, after taking a serious look at your finances, you see
that the debt you have managed to accumulate cannot be reasonably paid off even over a long period.
It should not be seen as a "get out of jail free" card, and there are many lingering effects of declaring
bankruptcy. A bankruptcy will effectively state that you acknowledge the debts you owe, and
acknowledge you cannot pay them.
Different states have difference specific laws on what you can keep when filing bankruptcy. Typically,
these are: the equity in your home, the cash value of your insurance policies, retirement plans (which
qualify under the Employee Retirement Income Security Act [ERISA], does not include IRA and Keoghs),
most personal household property (clothing, furniture, jewelry valued at less than $1000), public
benefits (welfare, food stamps), several thousand dollars worth of equipment necessary to perform
your current job, and usually around 75% of wages you have earned but not received.
The Bankruptcy Reform Act was passed for two main reasons - consumers attempting to simply abuse
the system to shrug off their debt, and consumers filing for bankruptcy when unknown to them there
were far better options available. Fully named "The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005", the Act was instituted to both reduce the number of frivolous bankruptcy
claims entering courts and also ensure consumers were not taking a needlessly harmful step without
exploring their alternatives. These reforms are thus focused on making sure the consumer is as
reasonably educated and responsible for his debts as he can be. The main rules of the Reform Act are:
- Before filing, you must consult a court-approved credit counselor. This is to ensure that
given your situation, a certified expert agrees that bankruptcy is your best course of action. In many
cases, these counselors are able to draft a different plan of action, allowing the consumer to pay down
their debt without having to needlessly go through the rigors of a bankruptcy.
- Your lawyer must conduct a reasonable investigation of your application. By doing so, the
bankruptcy filing gains the approval of a legal counselor that has stated the filing was not done under
fraudulent circumstances. If this turns out not to be the case, both the consumer and their lawyer
would be subject to severe legal repercussions.
- You must meet with your creditors to discuss the terms of your filing. Though you may not
have to meet with them personally, you must make sure that your creditors are aware that you are
filing bankruptcy on a debt you owe to them. This gives them reasonable time to file with the court if the
debt you owe to them is not eligible to be filed with the case, for whatever reason.
- Depending on how you file, the court will employ a "means test" (Chapter 7), or an
examination of your disposable income (Chapter 13) to determine if you cannot repay
what you owe. This last legal step ensures to the court that you simply don't have the income to deal
with your debt reasonably. A means test involves a basic comparison between your income (of all kinds)
against the amounts you owe. This test looks to see if you flatly do not have the income to dig yourself
out of debt in the foreseeable future.
- Finally, you must attend a course in budgeting and personal finance management to
avoid repeating mistakes. At the end of the day, bankruptcy should not be seen as being bailed
out of a bad situation. Filing bankruptcy should be considered a drastic step when all other solutions
have failed, and once taken, every reasonable effort should be made by the consumer to keep from
falling into the same situation again.
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