Today many Americans are struggling with debt and trying to determine the best option to resolve their debt issues. One option to consider is bankruptcy. Bankruptcy is considered an option of last resort only to be considered when other possible solutions have been exhausted but to individuals buried in credit card or other unsecured debts it is an option that should at least be understood before being dismissed out of hand.
Federal Bankruptcy for individuals in the US takes on two major forms:
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1) Chapter 7 - Liquidation
2) Chapter 13 - Reorganization
When most people think about bankruptcy they think about Chapter 7 liquidation and that is the option that we will address first.
Chapter 7 bankruptcy is available to residents of the US that either have a business or own property. It is not available if you have had a previous bankruptcy case closed in the past 180 days. Under chapter 7 some but not all assets must be sold or liquidated in order to make payment to your creditors. Under most circumstances the home and one or more autos are not subject to liquidation and forced sale, but the related mortgage loan and auto loans also will remain in effect after the bankruptcy. Certain other property you own may be exempt from liquidation but this varies dependent on the state you live in. Most unsecured debts ( IE credit cards, medical bills) are discharged or canceled under chapter 7, but there are some notable exceptions. Tax debts less than 3 years old, fines and restitution imposed by a court, federal student loans, and any alimony or spousal support payments will remain in effect after the bankruptcy. Any attempt of the filer to hide assets or mislead the bankruptcy court regarding your financial circumstances is unlawful and can be subject to investigation up to five years after the bankruptcy is discharged.
The benefits of chapter 7 to the borrower are obvious - discharge or cancellation of most unsecured debts and a fresh financial start.
However there are numerous drawbacks:
1) Sizable attorney fees
2) Probable loss of some assets
3) Your credit and borrowing ability severely impacted for the following ten years
4) Some employers will look negatively on your bankruptcy
Chapter 13 is the other common form of bankruptcy and it involves reorganization of your debts under the direction of the bankruptcy court.
Meaning that the court will act to administer changes in monthly payments and terms dependent on your financial circumstances. Under chapter 13 repayment of debts must be completed within five years or less.
Chapter 7 may be an option for borrowers so mired in debt that there seems no other option. - when multi thousand dollar medical bills or extremely heavy credit card debts are present for example. It would be recommended that the borrowers pursue the possibility of settling credit card debts and medical bills through a debt settlement firm before turning to chapter 7 bankruptcy.
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