Understanding bankruptcy

What are the different types of bankruptcy?

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Chapter 7

Chapter 7 bankruptcy is the most common type of bankruptcy that individuals file for. It is faster and cheaper than Chapter 13, and is also known as “liquidation,” as assets are sold (or “liquidated”) to repay as much of the debt is possible.

Chapter 7 is often used to clear out unsecured debt, like credit card debt.

In order to qualify for Chapter 7 bankruptcy, you’ll have to take a Means Test which is basically a test to prove that your income is insufficient to pay back your debts.

(If you don’t pass the Means Test, or the courts disagree that you can’t pay back your debts with your current income and financial situation, you may have to file for Chapter 13 instead.)

If you were to move forward with Chapter 7, what would happen is you would work with your bankruptcy attorney to fill out all the relevant forms and specify which items you are keeping.

Keep in mind that when you file for Chapter 7 bankruptcy, you will likely be able to keep most of your belongings that are actually necessary to your income and general well-being, like a car, some clothing and home appliances. But you won’t be able to keep more than one car, a second home, jewelry over a certain value, family heirlooms or other expensive items that the courts don’t view as necessary.

You’ll then sell off any of your belongings that aren’t exempt to pay back as much as you can of what is owed, and the rest of the debt would be wiped clean.

The entire process usually takes around four to six months, though it can sometimes be longer.

Once your bankruptcy discharge is issued, you are relieved from any further liability for the debt that has been released, and creditors are banned by the courts from trying to collect on that debt in the future.

If this sounds like a possible solution to your financial stress, you’re invited to call and speak to one of our bankruptcy attorneys today to get a free consultation and determine whether or not it’s the right choice for you.

(For a full explanation of the ins and outs of personal bankruptcy, along with complete details of requirements and other points to consider, download our free guide, The Ultimate Guide to Understanding Bankruptcy.)

Chapter 13

Many people file for Chapter 13 bankruptcy when they have secured debts, like mortgages or car loans, on property they plan to keep.

While Chapter 13 can take much longer than Chapter 7, that’s because you’ll actually be making good on your word and paying back your debtors, on a repayment plan that works for your financial situation.

Chapter 13 is a great way for indebted Americans who feel morally obligated to pay back their debts, but are struggling to keep up with additional penalties and interest, to keep their word.

With Chapter 13, it’s actually more of a “reorganization” of your assets and debts. Between the courts, your bankruptcy attorney and yourself, you’ll work out a repayment plan that fits within your means.

Over the course of the next three to five years or so, you’ll pay back your debtors without accruing the high interest and penalties that would normally accompany such timelines.

You should know that if you don’t stick to the new payment plans, your creditors are able to resume collection processes (such as foreclosure) in order to collect the debt.

Plus, since you are actually paying back what is owed, not getting it waived like with Chapter 7, Chapter 13 usually has less of a negative impact on your credit score.

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