Bankruptcy Law

Unemployment, large medical expenses, marital problems, seriously overextended credit and other large unexpected expenses can wreak havoc on a family budget, sometimes damaging it beyond repair. In cases like these, the law provides a financial lifesaver in the form of bankruptcy. Bankruptcy is a voluntary petition for relief by a debtor who is considered legally insolvent. However, since no two debtors' situations are the same, several different types of bankruptcy are available.

Chapter 7

Chapter 7 is the type of bankruptcy most commonly used by individuals and is sometimes referred to as a straight bankruptcy. It eliminates most kinds of unsecured debt, usually within four months, and gives the borrower a fresh start.

Non-exempt property is then turned over to the bankruptcy trustee who converts it to cash and disperses it to creditors. Personal property such as homes or cars can be at risk, but in most cases they can be protected.

Pros

  • There is no limit to the amount of debt you can annul.
  • Creditor harassment will stop immediately.
  • The court or your creditors cannot touch money you earn and things you acquire (except for inheritances) after you file for bankruptcy.
  • Once discharged, all credit balances are canceled.
  • There is no minimum amount of debt required and the bankruptcy will completely discharge in three to six months.

Cons

  • Non-exempt property will be taken from you and sold by the trustee.
  • Some debts survive and can be collected after your case is closed (e.g., mortgage liens).
  • A foreclosure on your home cannot be completely stopped, only delayed.
  • A loan co-signer can be stuck with the debt unless they file for similar protection.
  • You can file this type of bankruptcy only once every six years.
  • Bankruptcy damages your credit rating and stays on your credit report for up to 10 years.


Chapter 13

Chapter 13 is used for 25% of personal bankruptcies and is an interest-free debt repayment plan. All debt is consolidated and the court arranges a repayment plan. You pay back all, or a substantial portion of your debts in three to five years. During this time, your creditors cannot attempt to collect from you, thereby stopping the harassing phone calls and letters.

In order to qualify for a Chapter 13 bankruptcy, you must be working and make enough income to pay your normal monthly living expenses as well as the monthly Chapter 13 payment.

Pros

  • You keep all your property.
  • You are given a longer period of time to pay off your debts.
  • Chapter 13 can be used to deal with any debts that weren't canceled in a Chapter 7.
  • Creditors cannot use collection efforts and wage garnishment to pressure you into paying them off.
  • Co-signers are immune from the creditors' efforts to collect as long as the Chapter 13 plan provides for full payment.
  • Your lender cannot foreclose on your home.
  • You can file as many times as you need to.

Cons

  • Your disposable income will be tied up paying off your debt for several years.
  • Legal fees are higher for a Chapter 13.
  • Your debt must be under $1,000,000.


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