Debt Management

Types of Bankruptcy, and How/When to Use Them

For some people, their level of debt far exceeds their ability to pay. When this happens, filing bankruptcy might be the only option they have for clearing those debts. Unfortunately, the same people who need to file bankruptcy are often the most reluctant to do so, because of the stigma attached.

Here is some information that will hopefully reduce some of the stigma, and give people a clear idea of what bankruptcy is, and what it can do.

The Stigma of Bankruptcy

Debtors who use bankruptcy have long been viewed as deadbeats, and even fraudsters, who wrack up excessive debt with no intention of ever taking responsibility or paying them back. This image of the irresponsible scofflaw often keeps people from filing, especially if they are already feeling shame about their financial situation.

The reality is that people become overwhelmed by debt for a variety of reasons, many of them not their fault. For example, medical bills are the biggest cause of bankruptcy in the United States, followed closely by job loss and divorce.

The other stigma of bankruptcy is that your credit will be ruined forever.

The truth of the matter is that bankruptcy can damage your credit in some ways, but it can actually help it in other ways. A bankruptcy stays on your credit report for at least seven years. During that time, certain creditors may be less likely to extend you credit, and if you do get credit you could end up paying a higher interest rate. However, there are also those creditors who are willing to extend credit after a bankruptcy, which could help you rebuild your credit. Also, if your situation is really serious, then you are probably already seriously behind, in collections, and your credit is taking a serious beating. Filing bankruptcy probably won’t do any more damage than has already been done.

Types of Bankruptcy

There are six different types, or chapters, of bankruptcy in the United States, but only two are available to individual consumers: Chapter 7 and Chapter 13.

Chapter 7

Chapter 7 is the one most people picture when they talk about bankruptcy. This type of bankruptcy eliminates most debts and gives the debtor a clean slate. However, there are certain debts that cannot be cleared by Chapter 7 and these include:

·  Student loans, from both government and private lenders;

·  Court-ordered payments like child support and spousal support;

·  Taxes and other debts to local, state, or federal government agencies. However, a chapter 7 bankruptcy might defer some of those debts until the bankruptcy period has passed.

In exchange for discharging all of the debt, those who file chapter 7 must be willing to hand over any non-exempt assets to the courts, such as credit cards, vehicle titles, and property deeds, which will then be destroyed or returned to the creditors.

Chapter 7 is considered the best option for people don’t have any assets that they wish to keep, and do not have enough income to enter into a payment agreement with their creditors.

It costs money to file chapter 7, and it is generally more expensive to do so with a lawyer than to file on your own. However, the process of filing bankruptcy can be very difficult and confusing, and requires a lot of paperwork. It’s easy to make minor mistakes, which could delay your case or even get it thrown out of court. This is why it’s often best to use the services of a chapter 7 bankruptcy lawyer rather than filing alone.

Chapter 13

Chapter 13 is also referred to as a debt repayment plan. It’s similar to a plan though a credit consolidation company, except it is managed and administered by the courts instead of a private company. This type of payment agreement also holds more weight and both parties are bound by law to honor the agreement.

A Chapter 13 agreement could include all the debt, or could eliminate or reduce some of the debts so that you are only paying back a percentage, instead of the full amount. For example, if you have a vehicle that you purchased new, you might be able to negotiate to only pay back the principle without interest, or only the depreciated value of the vehicle instead of the full amount of the loan.

Once the agreement is made, a trustee of the courts collects the money from the debtor and distributes it to the creditors.

Because you are agreeing to pay back the debt, there are fewer restrictions on what you can keep, but there are still certain restrictions on which debts you can include in the bankruptcy. For example, student loans are exempt from Chapter 13.

Chapter 13 is the best option for people who have assets that they wish to keep, such as a car or a home, and also have enough steady income that they can afford to enter into a payment agreement with their creditors.

Like Chapter 7, it costs money to file Chapter 13, and it is cheaper to file on your own than with a lawyer. However, Chapter 13 requires even more paperwork than Chapter 7, and it also requires a lot more input from courts, which is why it’s best to hire the services of a Chapter 13 lawyer, instead of filing on your own. Also, a lawyer might be able to negotiate the terms of the agreement, including whether or not any amounts are adjusted, better than you could on your own.

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