Bankruptcy is easy, and sometimes it’s a little too easy, especially times of economic turmoil. You may think that if Donald Trump did it a few times and businesses file bankruptcy all the time, why not me?
I understand, I really do understand your train of thought, but business bankruptcy is much different from personal bankruptcy. If you’re going to file bankruptcy you need to be informed.
Most people have access to the two most commonly used types of bankruptcy. The one that you will file depends on your situation. The first is called chapter 7 bankruptcy, and the other is chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also called straight bankruptcy, is simple and straightforward. Your properties will be liquidated and turned over to a trustee. The trustee converts it to cash and then pays your creditor.
The creditor in turn will discharge part of your debt depending on the amount paid to them. Some exempt possessions cannot be included in the liquidation process like clothes, personal items, and in some cases, your car, etc.
You will most likely be advised to file chapter 7 bankruptcy if you do not have enough disposable income to pay your obligations via a payment plan or if you are unemployed.
Chapter 7 Bankruptcy Advantages
Chapter 7 bankruptcy is a straightforward process. After the liquidation process, the trustee is expected to process your discharge from debt. After the discharge, the creditor does not have any claim on your future earnings or properties and possessions anymore, and there is no minimum amount for you to file this type of bankruptcy.
Chapter 7 Bankruptcy Disadvantages
The worse and most obvious disadvantage of chapter 7 bankruptcy is the possibility of losing all your possessions. Another disadvantage of this type of bankruptcy is that it includes non-dischargeable assets. You may have to pay for some debts even after discharge. These non-dischargeable debts include alimony and child support, student loan, state taxes etc. Chapter 7 bankruptcy is included in the public records. This means your financial struggles are out in the open, and they can be viewed by anyone. Obtaining new lines of credit in the future will be harder.
Chapter 7 bankruptcy’s major credit impact is that it lowers your credit score, and it stays in your record for 10 years. You will also have a hard time getting a loan approved in the future, and if you ever get approved for a loan, the interest will definitely be higher.
Chapter 13 Bankruptcy:
This type of bankruptcy is also known as wage earner bankruptcy, and it is applicable to individuals with disposable income. It is an indirect way of collecting payments from you by the creditor. With this type of bankruptcy, your creditor has the right to take a certain amount from your salary regularly to compensate for your debt. These payments can last up to 3 to 5 years, depending on the agreed repayment plan. This is actually a restructuring of your debt rather than direct payment.
Chapter 13 bankruptcy Advantages
The biggest advantage of Chapter 13 is that you get to keep your assets including properties. It can also stop the foreclosure on your home if there is any on-going proceeding. It is likely that you will allocate a part of your salary to paying off your debt, and this type of bankruptcy gives you more time to pay-off your debt.
Chapter 13 bankruptcy Disadvantages
Even if it is less burdensome if you are given more time to pay-off the debt, it is at some point a disadvantage too. You are indebted to your creditor for a longer period. Also during this time, a trustee will handle your account making sure that you pay your debt regularly and on time. This is seen as a disadvantage by some since the trustee will require a regular financial report from you that includes even private financial activities. Another disadvantage is that Chapter 13 costs more on your part to file since bankruptcy attorneys usually charge more because of additional work. You also need to pay the trustee for handling your finances.
Like in the case of Chapter 7, Chapter 13 stays in your record for up to 10 years. You are also not allowed to borrow money or to apply for a loan during the settlement process of your present debts unless permitted by the bankruptcy court.
It is best to consult a bankruptcy attorney or a consultant before deciding which type of bankruptcy is the best option for you. As mentioned above, bankruptcy will stay in your record for up to 10 years; therefore, you need to carefully study the types of bankruptcy and your situation before taking action.
Based on some information here, would you want to settle your debt immediately and lose some assets or get to keep your assets and maintain your debt for a longer time? Have you filed for bankruptcy or are you in the process of filing? If you can, please share your experiences.