Bankruptcy is definitely a scary word, but I find that most people don’t really know what it is or why it can be necessary. Bankruptcy is a legal process designed clear consumers or businesses of overwhelming debt. When you file bankruptcy, you get automatic protection by the government. This stops creditors in their tracks. A process called an “automatic stay” provides immediate protection against lawsuits from creditors, foreclosure, eviction, and certain types of wage garnishment. When you file for bankruptcy, you hand your finances over to the court and a judge decides how you are going to pay back your creditors.
Filing Chapter 7
There are 2 different types of bankruptcy a consumer commonly uses; chapter 7 and chapter 13. In a chapter seven filing, your assets are liquidated (sold) to pay back a portion, or all of your debts. Your ability to qualify for chapter 7 depends on your ability to repay these debts, and what your income level is compared to your states average. A trustee will oversee the selling of your assets and make sure your creditors are paid off as much as possible. Certain types of property are exempt from being sold and this varies from state to state.
Filing Chapter 13
Another type of personal bankruptcy filing is chapter 13. This type is available to people that still have a regular income and can afford to pay back some of their debt. It is preferable to a chapter 7 bankruptcy because it allows the consumer to keep their property (including their homes!). Chapter 13 is more of a debt restructuring that allows the debtor to pay off their creditors with reduced or no interest. It requires the debtor to pay off their debts within a period of 5 years. If all the rules and plans are followed then the debtor will be given a full discharge of their debt. This means that they are cleared entirely of the debt and no further action by creditors can be taken.
Bankruptcy can’t Eliminate Certain Debts
Although bankruptcy can help eliminate certain debts (like credit card debt), there are certain types of debt that it cannot get rid of. Bankruptcy cannot stop most tax debts. It also cannot get rid of student loans, child support, or stop creditors from taking back secured property (i.e. collateral, like a car or a home). Bankruptcy may be more or less helpful depending on exactly who you owe money to.
Drawbacks of Bankruptcy
Bankruptcy can help you out of a bad financial situation if your are completely overwhelmed by debt. But, it can do some serious damage to your credit score and financial future. It will make it very difficult to get a loan, obtain credit cards, rent an apartment, or even get a job (although it is illegal to discriminate based on this). A bankruptcy will be on your credit score for 7 to 10 years and permanently in the public record. You can even lose all of your assets if you file chapter 7. Filing for bankruptcy is a very serious decision and it can do alot of damage. But, if you are struggling with huge amounts of debt that you know you cannot repay, sometimes it is needed and can be a good option.
This is a post by Garrett Driscoll from Debt Eagle.