What Is Bankruptcy?
Most people know what the term “bankruptcy” means, but not the full extent of it. When an individual is dealing with overwhelming amounts of debt and sees no way out, this is where bankruptcy comes in. An arduous and often embarrassing process, the average person hopes to never experience it. But, if you’re not dotting every “i” and crossing every “t”, you might find yourself in financial disarray. Bankruptcy is the formal process of legally announcing your inability to pay outstanding debts. An individual can declare bankruptcy as well as a business. We see it all over the news and most recently with Toys R Us.
What Are The Different Types Of Bankruptcy?
Bankruptcy falls into two main categories liquidation and reorganization. Also known as Chapter 7 bankruptcy and Chapter 13 bankruptcy. Remember, you must be eligible for filing under these chapters.
Chapter 7 Bankruptcy
This type of bankruptcy erases all qualifying debt which sounds good on paper. The catch is, you must allow the trustee to liquidate (meaning sell) some of your property to pay back the debt. The selling of certain properties is how the balance is created. Then the sales are given to the bankruptcy trustee. Don’t worry about all your property being sold, there are certain things that are exempt under state law. Known for giving people a “fresh start”, this chapter helps wipe out medical bills, personal loans, and credit card balances. However, certain debts can’t be eliminated such as:
- child support payments
- spousal support payments
- wrongful death awards
- injury awards
- student loan debt
Chapter 13 Bankruptcy
Frequently considered “wage earner” bankruptcy, this type of bankruptcy restructures debt for people with higher incomes. This chapter of filing allows you to keep all your property, but you pay creditors for the value of your items that are not exempt. The amount you pay is dependent on how much you owe and how much you have earned. Not all done at once, this is part of a three to five year payment plan. Any additional income by the person can be added to this payment plan. This is most often used for:
- car payments
- house payments
How To File Bankruptcy?
Now that you’ve come to terms with your bankruptcy, you need to file for it. Most people who declare bankruptcy will file voluntarily. First, a petition is filled out by the debtor, the person who owes the money. Once filled out, their assets will be evaluated, and some of it may go towards the debts. Then, the individual needs to find out if they are eligible for Chapter 7 or Chapter 13 bankruptcy. You may be approved for both or neither of them.
How Often Can You File For Bankruptcy?
There are no restrictions on the number of times you can file for bankruptcy. Although, there are certain protocols that need to be followed. An individual who has filed for bankruptcy before will receive a discharge with this information. No discharge notice means you can file for bankruptcy again with no time restraints. However, the discharge notices vary depending on if you filed for Chapter 7 or Chapter 11 bankruptcy. A Chapter 7 bankruptcy discharge means you must wait 8 years from the date you filed. Meanwhile, a Chapter 11 bankruptcy discharge means you must wait 4 years from the date you filed.
What Happens When You Declare Bankruptcy?
After signing your bankruptcy petition, your attorney files your documents with the local bankruptcy court within your jurisdiction. As the process goes underway, you will be given a bankruptcy case number and a trustee. The person who will be overviewing your case. All the creditors in your petition will receive mail notifying them of your situation. Therefore preventing home foreclosures and wage garnishments. Next, at your bankruptcy meeting, you will be asked questions by your attorney about the case. After this, you decide which bankruptcy chapter you will file for if you haven’t already.
How Long Does Bankruptcy Stay On Your Credit Report?
Depending on the petition you filed, bankruptcy might hurt your credit score. Although your credit is probably ruined before you even file. A Chapter 7 bankruptcy filing stays on your credit report for 10 years. Meanwhile, a Chapter 13 bankruptcy filing remains on your credit report for 7 years. Both cause long-term damage, but you might want to consider this difference when deciding which to file.
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