What is Bankruptcy?
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What is Bankruptcy?
Bankruptcy is something most people are uncomfortable discussing. They consider it a worst case scenario and hope that if they don’t talk about it, it won’t happen to them. Unfortunately, this stigma leads many people to end up in a much worse financial situation than necessary.
In reality, bankruptcy is not something that happens to someone. It is a process that people use to get their debt under control. Bankruptcy is a fresh start and a way to make a bad situation better. And depending on which bankruptcy option you choose, it can be a path to financial freedom.
The legal process of bankruptcy allows consumers to seek protection from debt collectors. When you file for bankruptcy, debt collection efforts stop. This means it can help you remain in your home, retain ownership of other assets, and no longer deal with the daily nuisance of calls from debt collectors. Bankruptcy can be the key to improving your life in every way.
Your unique financial circumstances will determine which bankruptcy option is right for you. Most consumers choose Chapter 7 or Chapter 13, primarily based on the assets they own.
What’s the difference between these two types of bankruptcy?
Chapter 13 Bankruptcy
Chapter 13 bankruptcy gives you a repayment plan that allows you to make monthly payments over a three to five year period. This type of bankruptcy is beneficial because it makes it possible for you to get control of your debts and pay toward them. It’s an option for those who have valuable assets to protect and who do not qualify to have their debts completely eliminated.
Sometimes Chapter 13 bankruptcy is called wage earner bankruptcy because in order to qualify, you need to have a reliable source of income.
Chapter 13 filers create a repayment plan that is approved by the court. This plan outlines how you will pay back your debts and manage your money over the course of the three to five year period you’re in Chapter 13. The amount you must repay is based on your earnings, the amount you owe, and the amount unsecured creditors would have received had you filed for Chapter 7 bankruptcy.
Though the qualifications for filing for Chapter 13 aren’t as strict as Chapter 7, there are still requirements, including limits on the amount of secured and unsecured debt you have.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the other option most common among individual consumers. It eliminates unsecured debts and offers some of the same exemptions allowed in Chapter 13. Secured property can be repossessed in Chapter 7, paid under the original agreement, or paid off based on negotiated terms. Chapter 7 bankruptcy is a shorter process than Chapter 13 – typically it takes about six months to complete.
Fewer people are eligible to file for Chapter 7 bankruptcy than Chapter 13. Qualifications are based on the amount of disposable income and types of debt a person has.
Keep in mind, neither chapter of bankruptcy will help you eliminate debts that are not eligible for discharge, including child and spousal support obligations, most current tax debts, and fees and penalties associated with court proceedings. Bankruptcy can, however, help you eliminate medical debt, credit card debt, and other unsecured loans, so you’ll have more money available to pay toward non-dischargeable debts.
In addition to Chapter 7 and Chapter 13 used by individual consumers, Chapter 11 bankruptcy is used by businesses to reorganize their financial affairs and Chapter 12 bankruptcy is an option similar to 13 for those whose debts are related to operation of a family farm or fishery.
Benefits of Bankruptcy
Though bankruptcy is never something for which you should strive, it can be a valuable tool to help you get your financial life back on track. People often have too negative a view of bankruptcy and in many cases, this causes them to postpone filing for longer than they should. If you are struggling to make ends meet on a monthly basis, paying only the minimum amount owed on debts, and considering liquidating your retirement and other savings to deal with debt, bankruptcy could be a viable option.
Bankruptcy is a big decision, but it also might be one of the best you’ve ever made. For many, it is the only way to get a handle on their finances and move forward from a better place. It’s also a tool that makes it easier to deal with unexpected and emergencies debts, including medical bills that’ll you’ll never be able to afford to pay.
Debt issues can be devastating, and depending on your financial situation, you might have no other choice but to file for bankruptcy. Anyone who feels there is no end in sight when it comes to repaying debt would benefit from considering bankruptcy.
In many cases, filing sooner rather than later can save you thousands of dollars, so even if you are unsure whether bankruptcy is right for you, at least gather information and consider how filing might improve your situation.
Bankruptcy is common, but it can still be a confusing and overwhelming experience for an individual. It is a legal process and as such, requires a great deal of paperwork that must be completed and filed correctly. Mistakes in bankruptcy, even ones that are unintentional, can be costly and result in denial of your request. It’s important anyone considering bankruptcy work with an experienced professional who can ensure the process is as smooth as possible.
If you believe bankruptcy might be an option for you, or you have questions about how these processes work and whether or not you qualify for Chapter 7 or Chapter 13, we can help. Contact 1.800.220.4318 for more information or to schedule a consultation.