Individual Bankruptcy erases debt for people who can’t afford to pay their creditors. It also stops foreclosures, repossessions, wage garnishment, and utility shut-offs.
Almost every modern legal system allows individuals to file bankruptcy. Most people file Chapter 7 bankruptcy, which discharges their debt in six to eight months. Chapter 13 is the second most common form of bankruptcy.
Debts
A debtor may file for bankruptcy if he or she is unable to pay the money owed. The court will then sell the debtor’s assets and distribute the proceeds among those owed money (the creditors).
Commencement of bankruptcy creates an estate which is technically the temporary legal owner of all property owned by the debtor at that time. The debtor’s creditors receive payment from the estate based on priority, secured and unsecured claims. Priority claims include alimony, child support and certain taxes. Secured claims include mortgages, car loans and other loans secured by property. Unsecured claims are generally credit card and medical bills.
Bankruptcy is often described as the “nuclear option” for debt relief and should only be considered after a consumer has exhausted all other formal options to reduce their debt. If you are struggling with unmanageable debt and need help, contact a financial counsellor[?]. They offer free, independent and confidential advice. They can also assist with alternative debt-relief solutions.
Taxes
For tax debts to be discharged under individual bankruptcy you must meet two requirements. First, the debt must be income taxes, specifically, not other types of taxes like payroll taxes and fraud penalties (SS523(a)). The second requirement is that the tax return for the debt must have been filed more than three years before you file bankruptcy.
If you have a tax refund coming, the trustee will want to compare it with the amount of income reported in your bankruptcy paperwork. You may be required to turn the refund over to the trustee to be distributed to your creditors.
In addition, you must pass Part 1 of your state’s means test in order to qualify for Chapter 7. This tests your disposable income, which is what’s left over after you document your reasonable and necessary expenses. If you fail this test, you’ll have to opt for a Consumer Proposal or another type of debt restructuring.
Property
In addition to discharging debts, bankruptcy can stop an eviction proceeding, foreclosure, repossession or utility shut-off. It also stops creditors from garnishing wages or levying bank accounts. It can allow you to keep property that is secured by a mortgage or lien, such as a home or car.
When you file for Chapter 7, a trustee takes nonexempt property and sells it to pay off your debts. Exempt property includes vehicles, homes, jewelry and collectibles as well as money in a bank account. The amount that you can keep depends on state and federal exemption laws.
At the start of a Chapter 7 case, the court creates something called an “estate.” It consists of all property owned by a debtor at the time of filing. This includes a debtor’s legal and equitable interests in real estate, personal property and other assets. It can include property that isn’t listed on a bankruptcy petition, such as an inheritance or gifts.
Income
In general, income is the money – cash or its equivalent – that comes in from work, interest on capital invested, or rent on land and property. It may also include gifts and inheritances.
Credit card and mortgage debts are often the main reasons people file bankruptcy, but other issues can also be significant. A common reason is the end of a marriage, which can leave you with debts from legal costs and loss of income. Other causes include major medical expenses (66.5% of all bankruptcies), poor financial decisions, and job loss.
Individuals can discharge most unsecured debt in bankruptcy. They can also keep certain key assets considered exempt. However, non-exempt property will be sold to pay creditors. These include cars, homes, furniture, art and stamp collections, musical instruments, and other items of value. These rules vary by state. They can also include unpaid income taxes and sales tax.
