Understanding the Concept of Bankruptcy

Many people who are experiencing financial problems for the first time really do not understand the concept of bankruptcy. We all understand the concept of broke. Being broke simply means you do not have the money to buy anything, but bankruptcy means, not only are you broke, but you owe debts and you have a legal responsibility to pay your debts. 

As a general rule of thumb, you are completely financially bankrupt if your current sustainable income plus any cash reserves will not pay all of your living expenses, pay interest on outstanding loans, and reduce some of your principal on those loans (while paying on them for five years). Depending on the state, the formula should not include any of your retirement savings as cash reserves. 

This personal bankruptcy story was posted on the internet in April of 2011, “I am close to foreclosure. The last letter I got from the mortgage company said they would start the foreclosure process. I have not made a mortgage payment since October of last year. My loan is $127K. The second mortgage has already written off the $8K debt. My credit card company is suing me for $15K after 6 months of nonpayment, and they have been calling me every day. 

I decided to call the credit card company to attempt to settle. There was a cash advance for $2000 and I was only able to make a couple of small payments. They said they would settle for about 43% of the debt, which was $1200. I can make payments from my tax refund, but would this be a waste of money? 

I am not sure I will file bankruptcy. My main income is from Social Security and anyone who gets a judgment would get $100 a month. Plus after foreclosure my debt isn’t that huge. I’d rather be saving the money. I’m thinking that I’m probably going to get some 1099-Cs from the combined debt being written off, and I am now reading about filing insolvency. I have no assets so I think this would work for me. I’m worried the cash advance may appear to be fraud. What should I do?” 

Filing for bankruptcy is a legal proceeding designed to protect both creditor and debtor and may allow a business or debtor to recover from a financial crisis. Under some condition, bankruptcy may help the filer have a fresh start. 

The debtor in this personal bankruptcy illustration is right to be concerned about the perception of the cash advance, but in this instance his concerns are most likely misplaced. The worst case scenario is that the trustee will file an abuse petition concerning the cash advance, and the debtor will be responsible for paying all or a portion of it. The cash advance won’t affect the rest of the bankruptcy. 

If the debtor in our story decides that he is completely bankrupt, he really needs the counsel of a bankruptcy lawyer to help answer questions about bankruptcy laws. 

If you are considering filing for bankruptcy because you need relief from the stress of debt and you live in or around the metropolitan area of Houston, Texas, contact us at www.betterbankruptcy.com . We will help you find a bankruptcy attorney in your area who will answer your bankruptcy questions.

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