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There are a number of ways of filing for bankruptcy in the US, and they are referred to as “chapters”. With 85% of debtors filing under chapter 7, this is the most popular form of bankruptcy in the US, probably as it removes all debt (there are some exceptions like tax, alimony and student loans to name 3), unlike the second most common form of bankruptcy, chapter 13, where debt is repaid by means of a legally enforced repayment plan.

This is despite the fact that in chapter 7 all assets are sold to repay as much money as possible.

The problem is that it is possible that the sale of an individuals assets will fall far short of the amount of money owed, leaving creditors out of pocket by some distance.

Now this may be unavoidable, however, it may be that an individual can, in fact, afford to repay their debts if they are rescheduled under a chapter 13 filing, which is essentially a repayment plan over a 3-5 year period.

Therefore, 2005 saw the introduction of a compulsory means test for individuals seeking chapter 7 bankruptcy, failure of which would automatically push them into a chapter 13 filing, which is a 3-5 year repayment plan.

The means test was introduced to ensure that only those who genuinely cannot repay their debts can claim chapter 7 bankruptcy.

If this works out at less than the median income for a household of the same size in the same state you immediately pass the means test and qualify for chapter 7.

The first stage of the test is to see if the applicant’s disposable income for the previous 6 months is less than the median income for a same sized household in the same state. If it is you can go straight into chapter 7. If not, the applicant is to some extent at the mercy of the court, who decide whether the amount of the applicant’s disposable income is sufficient to make some repayment of their unsecured debt. The applicant can often find that the court considers that they can, but in reality it leaves the applicant with very little money to live on, making life tough financially.

If you income is found to be greater than the median then you have to go through some complicated calculations. The problem an individual faces once they fail the first part of the test, is determining if your “disposable income” figure is sufficient, after paying monthly “allowed” expenses, to pay at least a proportion of your unsecured debts (credit cards for example).

The problem here is that different states have different rules as to what are the allowed amounts for day to day living expenses. However, if your “disposable income” is more than a certain amount, you fail the means test and are prevented from filing for chapter 7.

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So, now you can see the writing on the wall, you are in up to your neck and your creditors are starting to ring you at home in the evenings too. You know that you have to do something, but you’re not sure exactly what. It’s so embarrassing having to talk to that kid from your creditor’s debt collection department, especially over the phone; but you don’t want to take time off work to go down to their offices either! And you can’t wish the problem away. You’ve heard of debt consolidation and reduction and you think that perhaps you need to look into it.

However, before you think about debt consolidation and reduction loans, analyse your debts to work out your total debt. Debt is a source of credit lines given to you by creditors who thought that you would repay the amount borrowed or owed. When creditors become aware that you are behind on your repayments, they will usually delay a few weeks before reporting you to the collection agencies.

During this time, you ought to contact your creditors and request an extension of time, a balance reduction, or even a complete termination of the debt. Creditors do expect to get their balance and therefore, they may extend your credit, since they want to avoid the problems that arise when reporting customers for a default on payment.

Creditors do not want to make enemies of their customers, since they hope that the customer will show good faith and pay the debts and continue doing business with them. If you fail to contact your creditors, they will eventually turn your files over to the collection agencies. These agencies often use much heavier methods to retrieve the money owed.

These agencies will try almost anything to pressurize you so much that you will go all out to find a method to pay up, or else stress you so much that you need to seek professional assistance. Debt consolidation and reduction is one of the processes of eliminating debts; a loan may or may not be required.

When you contact your creditors, ask for leniency, so you can work toward debt consolidation and reduction by cutting back on your expenses. If the creditors agree to debt consolidation and reduction by lowering your payments, terminating it, or else providing you with an extension and you don’t take advantage of their generous offer, ie, if you fail to start repaying after the offer is made, then they will not be as friendly the next time you have contact with them.

Ensure that you make good your debts as agreed with your creditors to minimize any further complications. Communication is extremely important, because if you have ceased negotiations with your creditors, they have every justification to go all out to retrieve the debt. This will help you in your debt consolidation and reduction.

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In fact, there are very few Internet-based debt consolidation lenders, who will help debtors actually reduce their debts. However, home-owners who are having difficulties with debt, can use their homes as collateral to raise a consolidation loan to pay off their overdue debts. These loans are given to the debtor to pay off existing debts. However, then the debtor must pay off the consolidation loan in monthly instalments.

Therefore, all your bills are totted up and rolled into one debt consolidation package, which is repaid by one single monthly repayment. Furthermore, if you have credit card debts, then these loans and their interest will also roll into that one monthly instalment. Likewise if you have personal or home loans or any other forms of loan, then these are also rolled in the one debt consolidation or refinancing repaymentt per month. This is known as debt consolidation refinancing.

A few debt consolidation refinancing deals make it really quite easy and offer short programs, which will link you with an expert, who will search for a way to reduce your debts by appraising the details you provide him to see whether debt consolidation refinancing is right for you.

“Money Management International” (MMI) is one of the many online “Consumer Credit Counseling Services” (CCCS). These are non-profit organizations that offer debt consolidation refinancing support for debtors.

It is sometimes safer to use these non-profit organizations than the services of a bank or financial adviser. Since MMI is a member of the “Better Business Bureau”, we will refer to this debt consolidation and refinancing bureau to assist you to get an idea of what debt consolidation refinancing is available for you.

Once you have joined up with an online debt consolidation refinancing firm and have been accepted, then the professional financial experts will collaborate with your creditors and ask for consideration. This just means that the experts will work together to choose a debt consolidation refinancing offer that is suitable for both you and your creditors.

For example, if you are paying $1,000 per month in instalments, a debt consolidation refinancing counsellor might work to get your monthly repayment reduced to $500 give or take a couple of hundred dollars. This figure is half the amount you were paying in the first place and represents a bargain in debt consolidation refinancing, although you will have to keep the payments up for much longer!

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One should always first consider alternatives to bankruptcy.

Within 180 days of filing for bankruptcy, the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act makes it law that an individual must get some form of credit counselling.

This counselling is intended to make the individual aware of alternatives to filing for bankruptcy.

The most common bankruptcy types are what are referred to as chapter 7 and chapter 13 bankruptcy.

Chapter 7 bankruptcy involves the selling of almost all of one’s personal posessions, but despite this, it is the most popular option.

With the exception of certain debt, tax bills for example, any debt outstanding after liquidation of assets is cancelled and the debtor is no longer liable for it.

If an individual does not want to be forced to sell all their assets, chapter 13 bankruptcy removes this need altogether, by putting in place a repayment plan, debts being paid in full over a 3 – 5 year period.

To ensure that an applicant is being truthful regarding ability to pay their creditors, the 2005 legislation requires a means test to be completed to demonstrate that repayment is not possible, and that chapter 7 is the only viable option.

Given the complexities of filing for bankruptcy, including deciding the best type of bankruptcy to apply for and filling in the initial legal means test, a lawyer is essential.

Also, once a lawyer is acting for you, “automatic stay” comes into effect. This means that creditors can no longer approach you for money. All creditors have to deal through your lawyer.

One of the first things you have to do is supply a list of both debts and personal asets to the court. You will then be recorded answering a series of questions, on oath, at what is called a “Creditors Meeting” where the truth behind your financial submission is verified.

The court decides, in a chapter 7 filing, the assets to be sold and the proceeds distributed amongst your creditors, any remaining debt is then written off and you are no longer liable, resulting in a clean financial slate.

If, after the means test, it is shown that an individual is in a position where full repayment of debt can be made over a 3- 5 year period, a chapter 13 filing is made and a repayment plan introduced.

Under chapter 7, bankruptcy is discharged and notice issued a few days after the 60th day after the Meeting of Creditors, as long as no petitions have been made to the court challenging the discharge. Any challenges must be made not before the 60th day. Under chapter 13, the bankruptcy is discharged and notice issued some 30-60 days after verified completion of the repayment plan.

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