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The first step in bankruptcy is taking an inventory of the type and total amount of debt.  The next step is to find out what debts  are secured by property and that are unaffected by bankruptcy.  Pre-bankruptcy planning can be done to transfer non-exempt assets into exempt assets.

Bankruptcy law allows maintaining of essential properties and assets after a debtor files a bankruptcy petition.  Bankruptcy statutes provide different options for each category of bankruptcy.  For example, certain secured debts, like mortgage or car payments, can be hindered through a Chapter 13 bankruptcy plan.  A mortgage on the debtor’s primary residence cannot be altered.  However, some second and third mortgages can be removed in Chapter 13 cases if the first mortgage’s payoff is more than the property is worth.  In Chapter 7, there are restrictions to the amount of assets a debtor can protect.  This varies from state to state.  Generally, a debtor is able to protect retirement benefits, home equity, tools of the trade, etc.

Every state has a statute of limitations, so some debts may be time barred from collection.  Getting a credit report and looking it over for debts that are time barred or that are unknown can eliminate some debts.

After evaluating and categorizing debts, the next step is to review all property or equity in property.  Not all property can be protected (exempted) from creditors.  If you own property that cannot be protected and you want to keep that property, the liquidation test in bankruptcy will prevent filing a Chapter 7 petition.  The liquidation test states that your creditors must be paid at least as much money through your Chapter 13 Plan as they would have been paid had you filed a Chapter 7 petition. The difference is that the debtor, instead of losing property, simply pays out the current value of that property over a period of 3 to 5 years.

Property, income and type of debt all must be considered before determining that bankruptcy is the best option and whether Chapter 7 or Chapter 13 is the appropriate petition to file.

Inside Considerations—Generally