If you are thinking about filing bankruptcy,  it’s important to learn as much as you can about your options for avoiding bankruptcy, the consequences of filing bankruptcy, and how the process works. What is bankruptcy? It is a federal law that defines the process for protecting debtors and creditors, when someone has no way to pay the debts they owe.

Bankruptcy laws provide an option for dealing with a financial crisis, but all consumers are urged to fully understand the process and potential ramifications.

Two Common Types of Bankruptcy: Chapter 7 and Chapter 13

A Chapter 7 bankruptcy wipes the slate clean, eliminating many or all of your debts with no future payments. “Discharge” is the legal term that means you no longer have a legal obligation to repay a debt. In a Chapter 7 bankruptcy, your assets can be at risk and some debts will not be discharged. This type of bankruptcy proceeding takes approximately 90 days.

A Chapter 13 bankruptcy is a three- to five-year repayment proceeding. Your assets are protected, and certain debts, such as child support, taxes, car payments and mortgages are repaid over three to five years. This type of bankruptcy is an option instead of having your wages garnished or your assets seized. However, in exchange, you must agree to make a monthly payment of your disposable income to repay a portion of your debts.

Will Bankruptcy Help My Situation?

Bankruptcy can give you a fresh financial start on life. It can seem very attractive to people who cannot afford to pay their bills. But, the process is not right for everyone. Filing for bankruptcy comes with attorney fees and court costs. Additionally, it will negatively impact your credit report, and it may be difficult to obtain credit for two or three years afterward. You should always talk to a licensed bankruptcy lawyer to assess the pros and cons of filing in your particular situation. Many attorneys will give a free consultation to discuss a bankruptcy and alternatives.

Will Bankruptcy Eliminate My Debt?

Bankruptcy does not necessarily eliminate all of your debts. A Chapter 13 bankruptcy requires you to pay back a specific portion of your debts. Even in a Chapter 7, some debts such as child support obligations, spousal support, criminal restitution and fines cannot be discharged. Some other types of debts are dischargeable in some circumstances, but not others. For example, debts from taxes, bad checks and the fraudulent use of a credit card may not be erased (depending on the circumstances). Student loans are rarely discharged.

Will I Have to Give up all My Property?

Although Chapter 7 is a “liquidation proceeding,” you will be allowed to keep certain property, as long as the fair market value of each item does not exceed certain amounts. (Fair market value is not your original purchase price. It is sometimes described as “garage sale value,” or how much actual cash you would receive by selling the item to an unrelated party.) Certain property such as working tools, household furnishings, your car and your home may be entirely protected, or “exempt,” through bankruptcy. Unlike a Chapter 7 bankruptcy, a Chapter 13 case usually allows you to retain all of your “non-exempt” assets, but you will be required to make monthly payments to a bankruptcy trustee.

What Will Happen to my Credit Rating?

A Chapter 7 bankruptcy case will be reported by credit reporting agencies for 10 years. A Chapter 13 bankruptcy case will be reported by credit reporting agencies for seven years.  Some creditors will require an extended period of time after bankruptcy before extending further credit. This is certainly one reason to be cautious about filing bankruptcy.

NOTE: The information contained herein is for educational purposes only and is not legal advice.  You should seek advice from a legal professional regarding your particular situation.

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