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Bankruptcy should be the absolute last resort. Many people mistakenly look at
it as a "quick fix" to financial troubles.
For people who are behind on credit card payments, bankruptcy has become
increasingly resorted to. Bankruptcy is designed for people caught in severe
financial circumstances beyond their control such as illness or loss of a job.
While some debts will be eliminated, others such as alimony or child support
will not be discharged. Most consumers file either a Chapter 7 or Chapter 13
petition.
Chapter 7
Is often referred to as a "straight" bankruptcy or liquidation. This is used
by individuals with no steady income and few assets, Most personal bankruptcies
are filed under chapter 7. It eliminates most debts but also requires
immediate liquidation of most assets. In this form of bankruptcy you would
agree to turn over all of your non-exempt assets to a Chapter 7 trustee. The
trustee will then sell your assets and distribute the money to your creditors.
Exempt assets aren't part of the bankruptcy estate and remain your property.
In most cases, bankrupt people can keep a small equity in their homes, an
inexpensive car and limited personal property. State law and court practice
will determine the amount of flexibility you have in keeping assets out of the
bankruptcy estate.
Chapter 13 bankruptcy
Also referred to the wage earner plan is used by people with regular incomes
and less than $250,000 in unsecured debt and less than $750,000 in secured debt.
It is a reorganization of the debtor's obligations. The chapter 13 process
recognizes rather than liquidates the debtors assets, a repayment plan is
designed to pay off as much of the debt as possible. The repayment plan occurs
over 3 to 5 years and would be made to the chapter 13 trustee who disperses it
to the creditors. This works much the same as a credit counseling (debt
consolidation) repayment plan.
Some debts that aren't eligible to be discharged in a Chapter 7 filing, may
however be eligible for discharge in a Chapter 13 filing. Don't make the
mistake of filing for bankruptcy only to find out that the debts you need to
have discharged aren't eligible to be discharged. Debt you can't discharge in
a Chapter 7 bankruptcy filing include: most student loans, alimony, child
support, debts incurred through fraud, and liabilities resulting from drunk
driving, criminal fees, penalties and restitution.
Bankruptcy is not the absolute cure most are led to believe. Here are just
some of the post Bankruptcy Blues:
First, it costs money to hire an attorney and file the necessary paperwork in
court.
Second, not all of your debts will be discharged. If you owe taxes, alimony or
child support, or student loans you will still have to pay these debts.
Third, all of the debt that you discharge becomes a loss to the creditors who
are not likely to deal with you again in the future.
Lastly, the bankruptcy will be on your credit report for 10 years or more
depending on which type you file. Although you may be able to obtain credit
after a bankruptcy you will pay much higher interest rates and fees.
It has a negative impact on a credit report and can make it difficult to
purchase a home, rent an apartment or even get a job.
Persons who file bankruptcy are considered poor credit risks and most often pay
high interest rates or use secured credit cards.
Bankruptcy causes feelings of guilt or embarrassment.
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Debt Management
