A Guide to Bankruptcy
What is Bankruptcy?
You might have never thought of ever facing such a thing as bankruptcy. However, each of us may have things going the wrong way one day and stay with a huge unpaid indebtedness. No matter how scary it is even to pronounce the word “bankruptcy”, it doesn’t look like a good idea to just leave it where it is and put yourself in a debt trap. Especially since our government takes care not only of lenders but also of the borrowers. In case of financial difficulties, you will be protected by law.
Bankruptcy is a legal process proceeding in court by which people or companies who can no longer afford to pay borrowed money to creditors can request to discharge some or all of their debts. During the trial, a judge and court trustee decide whether to write off these debts so that debtors are not required to pay them.
Why Declare Bankruptcy?
What to do once you realize you owe banks a huge pile of money, your phone rings without ceasing, and the mailbox is full of letters with unpaid bills? Do not give way to despair, you are not alone!
According to statistics, over a million individuals file for bankruptcy every year. The reasons may be various, e.g. unemployment or large medical expenses, but bankruptcy can help do away with debts and start all over again. Moreover, declaring bankruptcy is to stop all creditors’ or collection agencies’ attempts to contact you, and prevent you from having utilities turned off, charges from the wages and eviction.
Types of Bankruptcy
To go bankrupt you should file for bankruptcy. Bankruptcy cases are handled in federal courts in accordance with the rules set out in the U.S. Bankruptcy Code. And the first thing you have to decide on when filing is a type of bankruptcy or a chapter. Probably, you will be surprised to find out there are six bankruptcy chapters. Let’s have a look at them:
- Chapter 7 is used by individuals and businesses for total liquidation of debts;
- Chapter 9 is used to resolve municipalities and other political subdivisions’ debts;
- Chapter 11 is typically used by businesses to reorganize in order to continue functioning and repaying debts at the same time;
- Chapter 12 is suitable for family farmers and fishermen;
- Chapter 13 is used by individuals to rehabilitate with a payment plan system;
- Chapter 15 is for foreign debtor companies.
Even though there are so many chapters, you are likely to choose from two most common ones: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
This chapter, also known as liquidation bankruptcy, is the most common chapter and the easiest and fastest way to get bankrupt. Both individuals and businesses are able to file for it. Chapter 7 bankruptcy allows you to become discharged within four months.
The biggest disadvantage of this chapter is the liquidation of your property. Nevertheless, you are still permitted to keep “exempt” property including your home, car, Social Security checks, etc. Meanwhile, “non-exempt” property like cash, bank accounts, a second car or home, etc. will be sold by a court trustee to pay off the maximum of your debts to creditors.
Chapter 13 Bankruptcy
This chapter is sometimes referred to as a reorganization bankruptcy. It enables individuals to pay off all or part of their debts over a period of 36-60 months. The debtor will have to make monthly payments to a Trustee who then will allot that money to the creditors. The main rule for you is to have a regular source of income.
Unlike Chapter 7, Chapter 13 does not involve liquidation. Thus, it is appropriate for those who want to keep their personal property and possessions. However, Chapter 13 presupposes a more sophisticated and extended legal process than Chapter 7, so it typically requires more expenses.
Bottom Line
On the one hand, bankruptcy causes significant damage to your credit score. You will have to rebuild your credit history from scratch. Moreover, it is not so easy to get rid of it and it remains in your credit report for up to 10 years. For example, Chapter 13 disappears from your credit report in 7 years, and Chapter 7 remains there for 10 long years. What is even more unpleasant is that bankruptcy can negatively affect your personal life, causing potential employers and lessors’ refusals.
On the other hand, bankruptcy sometimes is a necessary measure that allows you to reset debts and start all over again. No one will consider bankruptcy having no credit difficulties. Surely, your credit score is already not in good statement. Thus, declaring bankruptcy will most likely not greatly impair your current credit.
Therefore, thinking about applying for bankruptcy, you should clearly understand all pros and cons. Make a reasonable decision and file only if you feel there is no other way and you can’t exactly cope with all your debts on your own.
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