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Let's take a closer look at bankruptcy. Bankruptcy is a process in the U.S. federal court, as well as many other countries, which is targeted at helping both companies and individuals to clear up their debts and repay under the protection provided by the bankruptcy court. There are basically two types of bankruptcy orders: liquidation and reorganization.

Liquidation bankruptcy under Chapter 7 of the bankruptcy code, occurs when you plead to the court to have your debts discharged. Some of your properties will then be liquidated or sold by the bankruptcy court and the resulting moneys are then divided among your creditors. This type of bankruptcy process lasts for up to four to six months. This is actually quite fast and usually only one appearance at the courthouse is necessary. It is quite convenient and does not require payments stretched over a period of time.

However, chapter 7 bankruptcy is not available to everybody. You will not benefit from it if in the past six to eight years, you have already benefited from a bankruptcy discharge. In the same way, if after examination of your income, expenses, and overall debt, the court found that the other type of bankruptcy proceeding is more appropriate, you cannot insist on pursuing this type of bankruptcy process. Military veterans who are disabled and who incurred their debt at the time of their active duty are almost automatically allowed to file. In addition, those whose debts are caused by running a business generally qualify as well. For those not belonging to any of these categories, certain criteria need to be met.

The criteria have been affected by the new rules concerning bankruptcy. One of the considerations is your current monthly income. This is compared with the median income for a family of similar size in your state. This is not your income at the time of your filing. Instead, it is your average income during the past six months before filing. Social security benefits like retirement and disability benefits are not included in this computation. If your income appears to be sufficient to support the other type of bankruptcy proceeding in spite of allowed expenses and payments for child support, tax debts and others, liquidation bankruptcy is unfortunately not allowed.

Many people, if they have the choice, would prefer this type of bankruptcy process because repayment of a portion of the debt is not necessary. You may lose some of your properties but some courts permit some leeway that does not take all to give you something to start with afterwards.

On the other hand, reorganization bankruptcy, usually under Chapter 13, occurs when you file to a bankruptcy court a plan on how you intend to settle your debt. You need to show how much each of your creditors will get, depending on your finances. There is generally a three-year or five-year repayment plan, only after which can you be discharged of your debt, if any still remain. However, for obvious financial difficulties, the court itself decides at times to give a discharge earlier than planned and this is what usually happens.

An additional requirement for both types of bankruptcy is completion of credit counseling conducted by a recognized agency which has been approved by the U.S. Trustee’s office. This helps you to closely scrutinize the situation at hand and identify if bankruptcy is really essential. This permits you to evaluate several informal repayment possibilities that you may have overlooked in the past. Even if such is impossible, counseling remains a major requirement. Furthermore, completion of post-counseling is required following the proceedings. This aims at teaching you financial management in order to avoid encountering the same situation in the future. The bankruptcy discharge will not be released unless this is fulfilled.

Bankruptcy may be beneficial for both the debtor and the creditor. This is a way of recognizing one’s responsibilities and errors that led to the financial difficulties in the first place. The entire process takes into consideration the interests of both parties and leads to the development of an action plan to fulfill them. Any debtor thinking that a court is there to intervene should not abuse this law.

Finally, bankruptcy, although usually beneficial, must be considered as a last resort. You should always work hard to be in full control of your finances to avoid being caught in difficulties. Discipline is indeed a very crucial trait that must be maintained at all times.

Move on now to the next step in your free debt relief guide, dealing with changing your lifestyle.