What is Bankruptcy?

 
Bankruptcy is a fresh financial start for people who can no longer pay their bills and are in a large amount of debt. It is, however, designed to be the option of last resort. Bankruptcy is a federal law that enables you to wipe out a portion of your outstanding debt or to work out a plan to repay some of it. You can choose to file individually or jointly as a married couple.

There are two types of personal bankruptcy: Chapter 7 and Chapter 13.

Chapter 7

Referred to as “straight” bankruptcy or “liquidation,” this type of bankruptcy wipes out all dischargeable debts in exchange for certain property that is sold and the money disbursed to pay your creditors. “Exempt” property is property the law allows you to keep -— this can include your home or car depending on your state’s exemption rules. Debts that are not forgiven include child support, alimony, most student loans and most tax debt. One important thing to keep in mind is that a Chapter 7 does not eliminate the right of mortgage holders or car loan creditors to take your property to cover your debt.

Chapter 13

This kind of bankruptcy is often referred to as “debt reorganization.” It allows you to propose a plan showing how you will pay off your debts over a 3- to 5- year period. The key benefit of a Chapter 13 is that you are able to keep property such as your house and car. However, Chapter 13 still requires you to pay your debt. In most cases, expect your house and auto payments to be at least as much as your regular monthly payments, with some extra devoted to getting you caught up on the delinquent amount. 

Pros and Cons of Bankruptcy

Bankruptcy can be beneficial in many ways. It can stop foreclosure on your house or mobile home, prevent repossession of a car, stop wage garnishment and restore or prevent termination of utility service. But bankruptcy may not solve all of your problems. For example, you cannot discharge debt types such as child support, alimony or most student loans. You must budget and spend responsibly or you may find yourself back in financial trouble and may not be able to file again for either Chapter 7 or Chapter 13.

Pros 

1. Stops collection calls and letters. 
2. Stops wage garnishment.
3. Chapter 7 can wipe out most or all unsecured debt. 
4. Chapter 13 enables you to save your home from foreclosure and catch up on delinquent payments.
5. Chapter 13 prevents repossession of a car or other property.

Cons

1. Does not eliminate secured debts. You can keep your home, car or other property only if you continue to make payments.
2. Does not erase child support, alimony and most student loans and taxes.
3. Negatively impacts your credit rating. Remains on your credit report for 10 years, and obtaining credit may be more difficult and expensive in the future.
4. Does not eliminate any debts incurred after the bankruptcy was filed.
5. Cannot file again for Chapter 7 within 8 years. Cannot file again for Chapter 13 within 2 years or if you’ve received a Chapter 7 discharge within past 4 years.
6. If you are considering bankruptcy, a free GreenPath debt counseling session can help you determine whether or not there might be a better way to solve your financial concerns and begin rebuilding your financial future.