Chapter 7 Bankruptcy
There are several different types of bankruptcy. First, we’ll focus on the most common form of bankruptcy in the United States: Chapter 7.
When most people think of bankruptcy, they think of wiping away debt. You may imagine that it will take some time to rebuild your credit, but the relief of having debt abolished is worth it.
Unfortunately, that is not the full reality of what it means to file for bankruptcy.
Debt Liquidation
Bankruptcy isn’t as simple as wiping away debt. Sometimes, as is the case with a Chapter 7 filing, it focuses on liquidating assets. That’s when you sell everything that has financial value, and use the money to repay creditors. Whatever you can’t pay back after going through this process is generally forgiven. You will still suffer the consequences of having a bankruptcy filing on your credit rating. And, some forms of debt, such as student loan debt, never goes away.
A Chapter 7 bankruptcy filing can help because it allows your attorney to arrange for an immediate hold on your debts so that creditors are not allowed to try to collect. This can stop foreclosure on your home, and can prevent utility companies from turning off your heat, water, and electricity due to nonpayment. This can also prevent creditors from having your wages garnished.
It’s important to note that Chapter 7 filings are generally only allowed for people who meet a certain low income threshold.
What assets must be liquidated?
Because the list of assets that must be liquidated varies from state to state, you’ll generally work with a trustee to determine what must sold – or liquidated – to satisfy your debt. This process can take several months to complete. Once you have satisfied your obligation to liquidate, the rebuilding process begins. You will need to spend the next decade developing new financial habits as you rebuild your credit rating.
Debt that is generally discharged
- Credit card debt
- Personal debt
- Medical bills
Debt that won’t go away
- Student loans
- Alimony
- Child support
Chapter 13 Bankruptcy
Another common form of bankruptcy in the U.S. is known as Chapter 13. This is a form of bankruptcy designed to provide relief for people who are earning a steady income. It focuses on a repayment plan so that individuals can systematically repay their debts. The repayment plan consolidates debt into one monthly payment typically paid over the course of three to five years.
The key advantage to Chapter 13 over Chapter 7 is the ability to keep your assets. You could halt foreclosure proceedings and potentially keep your house. Another key benefit is that a Chapter 13 filing allows you to remain protected from creditors sending your accounts to collections.
This gives you some breathing room so that, ideally, you can use this time to revise your spending habits and make some changes to how you handle money moving forward in addition to paying back what you owe.
Of course, Chapter 13 bankruptcy is not for everyone. There are limits to who may apply, including:
Debts cannot exceed a certain amount, currently $394,725 for unsecured debts like credit cards, and $1,184,00 for secured debts, like mortgages or auto loans
Credit counseling from an approved credit counseling agency is required
How Do You Know Which You Need?
If your income is limited and paying back your debts is not feasible, Chapter 7 can provide a lifeline. This option is not without discomfort, because you must liquify your assets. But the upside is having the opportunity to start rebuilding your credit history anew.
Conversely, Chapter 13 is an option more in line with reorganizing your debt over a period of years. Chapter 7 doesn’t eliminate debt or require a payment plan, but does require you to pay down debt by liquidating assets.
Either way, you generally can’t apply for bankruptcy more than once in a specified period of time. And no matter what, you will take a serious hit on your credit rating.
But, both options can provide a lifeline when debt has gotten out of control, regardless of circumstances.
The best way to determine which, if either, form of bankruptcy is right for you is to consult an attorney. Bankruptcy sounds simple, but in reality it is a complicated process with serious consequences. It is best to move through this process informed and armed with legal counsel.
How to Move Forward
The most important thing to remember when considering any type of bankruptcy filing is that, no matter which avenue you pursue, bankruptcy is never a quick or easy fix. There is no way to make all debt disappear so you can start from scratch. At best, you will have the bankruptcy filing on your credit history for many years, which can have a serious impact on your financial future. But, even with the reality of a black mark on your credit score, the peace of mind you will achieve by considering this option could be a real lifeline.
Filing for bankruptcy is never an ideal situation, but it can be a lifeline for those who need it. The most important step you can take for your future is to realize you need to take steps to correct your finances. Because Chapters 7 and 13 are only two forms for bankruptcy filing, it is best to consult an attorney who specializes in bankruptcy to discuss if bankruptcy is a process that is right for you.