Types of Bankruptcy
Bankruptcy is a lifeline for people that can no longer pay all of their debts. Bankruptcy allows individuals to repay—or in some cases—discharge some or all of their debts under the protection of the federal bankruptcy court.
Once you have decided to file bankruptcy, you will need to decide which chapter or type of voluntary bankruptcy is best for you. There are two types of bankruptcy for consumers:
- Chapter 7 – This bankruptcy, called a liquidation bankruptcy, allows consumers to discharge most of their debt. However, the trustee may seize and sell the debtor’s property to pay back creditors.
- Chapter 13 – During a Chapter 13 bankruptcy, debtors repay some or all of their debt based on a payment plan that is set up by the court. Typically the debt is repaid over a period of three to five years.
How Do I Declare Bankruptcy?
To declare bankruptcy, you must file a petition with the federal court. For a successful bankruptcy, it is best to consult with a qualified bankruptcy attorney. Although you can file without a lawyer, the United States bankruptcy court advises against this. Bankruptcy has long-term legal and financial outcomes. The United States bankruptcy code is complicated. A successful case requires knowledge of detailed laws and procedures. It is easy to make a mistake if you are not familiar with the bankruptcy rules.
Here are some common mistakes that people make when declaring bankruptcy without an attorney:
- Filing the wrong chapter of bankruptcy – Each type of bankruptcy has benefits and consequences. Filing the right chapter bankruptcy is critical.
- Not filing incorrect forms – This could result in your bankruptcy case getting dismissed.
- Not completing required debtor education and credit counseling requirements.
- Failing to follow bankruptcy rules.
- Not using the correct bankruptcy exemptions – Exemptions are critical as these allow you to keep certain types of property in a bankruptcy case.
- Failing to show up at your meeting of creditors – If you don’t show up to this meeting, your bankruptcy case might be dismissed.
- Filing a Chapter 13 plan that is not feasible – A Chapter 13 is very complicated. It involves submitting a viable plan to pay back your debts over a period of several years. If your plan is not feasible, then the trustee or your creditors could object to your plan.
An attorney can help guide you through the bankruptcy process. They can advise you on which chapter would be the best to resolve your financial difficulties and help you get a fresh start.
What Happens If I Declare Bankruptcy?
I know what you’re thinking, “what does bankruptcy do?” Well, what happens when you declare bankruptcy depends upon which chapter you file.
Chapter 7 Bankruptcy
This type of bankruptcy is called a liquidation bankruptcy because your assets are liquidated to pay back your debts. After your assets are sold, then the rest of your debts are forgiven.
Do I Lose Everything If I File Chapter 7?
Many consumers are afraid that they will lose everything that they own by filing Chapter 7 bankruptcy. However, that is not necessarily the case. The court allows you a certain number of exemptions, which enables you to keep certain assets. The number of exceptions that are allowed depends on state law.
Chapter 13 Bankruptcy
During a Chapter 13 bankruptcy, you make payments on your debts through a court-approved plan. Your debts are paid over a period of time—usually three to five years. This bankruptcy is often used by individuals that don’t qualify for Chapter 7 because they make too much money. It is also used when the person has non-exempt assets that they would like to save, such as a house or a car.
To file Chapter 7 bankruptcy, you must meet certain income requirements. An experienced bankruptcy attorney can help you determine if you qualify to file bankruptcy.
Should I File Bankruptcy or Choose Debt Settlement Instead?
Many consumers who are considering filing Chapter 13 consider debt settlement instead. Both have pros and cons. It is best to talk with a bankruptcy attorney to determine which is right for your situation.
Life After Bankruptcy
Many people that are considering bankruptcy worry that they might have trouble getting a car or house again. However, this is not the case. Most people feel a sense of relief after filing as the burden of crushing debt is no longer upon them. Although a bankruptcy does stay on a credit report for seven to 10 years, filers can buy a car or even a house in as little as a year or even less if they work hard at maintaining their credit.
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