Bankruptcy 101

When facing a financial crisis, you can easily get overwhelmed sorting through all your available options. Besides paying down balances on your own, there are other solutions to take control of your debt. Some of these include debt consolidation loans, debt management plans and debt settlement. Usually, bankruptcy is an option that’s considered a last resort. Unfortunately, it has a negative impact on your credit score and can be costly. However, it can be a good option over debt settlement because it’s more of a guaranteed solution, compared to negotiating with creditors over a period of months or years. The more you know about debt relief options, the better equipped you’ll be to make the right decision for your situation. Although there are multiple types of bankruptcy, let’s focus on the  two most common individual types of consumer bankruptcy: Chapter 7 and Chapter 13.

Chapter 7  

The most common type of bankruptcy is Chapter 7, sometimes  referred to as a straight bankruptcy or  liquidation case. Under a Chapter 7, a Trustee is appointed to sell or liquidate all the debtor’s non-exempt assets and property to raise cash to pay back the creditors. Simply, all the things the debtor owns will be sold, and cash from the sales will go towards paying the outstanding debt. However, here are some stipulations: not all property can be sold by the trustee (called exempt property) and not all debts are included in the Chapter 7 – such as student loans, taxes, child support and alimony. Additionally, you have to pass a means test to determine if you are eligible to file Chapter 7 bankruptcy.

One of the most severe consequences of filing bankruptcy is its effect on your credit report. A Chapter 7 bankruptcy stays on your credit report for 10 years, which has a major impact on your credit score. Nevertheless, you can take steps to rebuild your credit history even before the bankruptcy is removed from your credit report. Meeting with a Financial Advocate will help you identify which steps to take, such as making timely payments on debts that were not included in the bankruptcy or obtaining a secured credit card, which can help you rebuild your credit.

Chapter 13 

In a Chapter 13 bankruptcy (also called a “wage-earner plan”), someone with regular income repays all or a portion of their debts over a three-to-five-year period through a Bankruptcy Court approved monthly payment plan. A Chapter 7 bankruptcy usually results in a loss of property to raise cash to pay creditors, but with a Chapter 13 bankruptcy, the debtor may be able to reinstate secured loans, resume making the regular monthly payments, and retain their property. This is important since it means that under a Chapter 13, you could ultimately keep your house whereas in a Chapter 7, your home would have likely been liquidated. Like a Chapter 7, there is eligibility criteria to determine if you’re able to file bankruptcy under Chapter 13.

A Chapter 13 bankruptcy will remain on your credit report for seven years, making it less impactful than a Chapter 7, but the consequences on your credit score are still serious. Once you complete the repayment plan, you can start your journey to rebuilding your financial health.

Bankruptcy Counseling

Filing for bankruptcy can be complicated but working with a nonprofit credit counseling agency like CCCSMD can help you create a plan for long-term financial success, without as much headache. The first step is to obtain pre-filing bankruptcy counseling and the last step is to complete pre-discharge bankruptcy education. These bankruptcy counseling sessions ensure that you understand the process, consequences and long terms strategy for avoiding bankruptcy in the future. An attorney and a bankruptcy trustee will walk you through each of the other steps in the process as well.

In summary, filing for bankruptcy is a major financial decision that has long term consequences on your credit report. It can be an emotionally draining process to go through and should be looked at as a last resort for debt solutions. However, if it’s the right solution for you, it can serve as a fresh start and bring renewed hope to your financial future. For more information and to see if bankruptcy is the right path for you, call us today at (800) 642-2227.