What is Bankruptcy?
Bankruptcy is a legal process designed to help individuals who are unable to repay their debts. Its goal is to offer individuals a fresh start. However, creditors still can ask for repayment with the bankruptcy process. Additionally, filing for bankruptcy can damage your credit score and will stay on your credit reports for several years, making it difficult to borrow money in the future. Thus, you may want to negotiate with your creditors to think of other solutions. Nevertheless, if bankruptcy seems like the best option for your situation, it is crucial to understand the different kinds of personal bankruptcy for your financial recovery. The most common types of personal bankruptcy are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 is also known as liquidation bankruptcy. It involves selling off all non-exempt assets, such as family heirlooms, second homes, and investments like stocks and bonds to pay creditors. This process helps dispose of unsecured debts (meaning not backed by collateral such as a house or a car that could be repossessed), such as credit card balances and medical bills. Individuals without valuable assets and only exempt property (e.g., household goods, clothing, tools needed for employment, pensions, social security – basically anything that the government decided should not be able to be taken from you) may end up repaying little or even none of their unsecured debt. Most of the debts will be discharged at the end of the process, although certain obligations like student loans, child support, and certain taxes owed cannot be eliminated.
To qualify for Chapter 7, individuals must pass a means test, which compares their average income over the past six months to the state median. If their income is below the median, they are likely eligible for Chapter 7 bankruptcy. If their income exceeds the median, they might still qualify by deducting specific allowable expenses. However, if the calculation shows that they have enough disposable income to start repaying their debts, the court may require them to file for Chapter 13 instead. To determine eligibility, individuals must complete Form 122A-2.
Chapter 13 Bankruptcy
Chapter 13, also known as reorganization bankruptcy, allows individuals to retain their assets, including the nonexempt ones, while repaying their debts over a period of 3-5 years. After completing the repayment plan, the remaining debts are discharged. This type of bankruptcy is particularly beneficial for those with debts that cannot be discharged under Chapter 7, such as child support obligations. It provides a way for individuals with regular income to create a manageable debt repayment plan.
Chapter 13 also allows debtors to communicate directly with their creditors and protects them from actions like lawsuits. However, it remains on credit reports for up to 7 years, though it has a less severe impact on credit scores when compared to Chapter 7.
Steps to Take Before Filing for Bankruptcy
Bankruptcy is typically viewed as a final option for individuals. Therefore, before filing for bankruptcy, there are several steps to undertake. First, you should evaluate your debts, assets, income, and expenses. Then, create a detailed list of all your creditors and the status of your payments. Next, explore alternatives to bankruptcy, such as negotiating with your creditors to potentially reduce interest rates or payment amounts. You may also want to decide which type of bankruptcy to file and understand the eligibility requirements and implications of each. Consulting with a bankruptcy attorney is also a good idea, since they can provide valuable advice and help with necessary paperwork.
Conclusion
In conclusion, filing for bankruptcy is a significant decision for individuals. Therefore, it is essential to carefully consider your financial situation and the alternative options. It is also important to understand the differences between Chapter 7 and Chapter 13 bankruptcy to choose what is the best for your conditions. Additionally, seeking professional advice can offer valuable guidance throughout the process.