Unfortunately there are times in life where, for a variety of different reasons, debt may become too heavy to escape. It is in those moments that bankruptcy may become necessary.
Although the bankruptcy process may have long term effects on your credit rating, it can also give you the chance to get back on your feet and start from scratch. Not a bad thing for a person who is drowning in debt.
There are a couple of different types of bankruptcy but the most common, for individual consumers, are Chapter 7 and Chapter 13. (The term chapter refers to the section of the United States Code where a particular type of bankruptcy is outlined.) Other types of bankruptcy include chapter 11, which is primarily intended for use by businesses to restructure debt, and chapter 12 which is used to assist family farmers.
Bankruptcy is unique in that it is based in federal law and thus bankruptcy proceedings are held in federal court, not the Missouri Court System.
Whether bankruptcy under chapter 7 or chapter 13 is right for you depends on your unique circumstances. Here are some of the differences between the two processes.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is a liquidation. It provides an orderly, court-supervised, means of selling assets to pay creditors. Under Chapter 7, a court appointed trustee sells your, nonexempt, property to pay your debts.
As soon as a person files for bankruptcy under chapter 7 most creditors are immediately stopped from further collection.
Without objection, debts can be discharged within a few months of filing. The process can be quick. And after discharge debtors cannot recover against you, although not all debt can be discharged.
Chapter 7 bankruptcy can give you a clean slate to move forward with however there are some negatives.
First, your property is sold by the court and liquidated to repay your creditors.
Second, there are income requirements, if you make too much you cannot file for chapter 7 bankruptcy.
And third, a chapter 7 bankruptcy will show up on your credit report for up to 10 years, which will negatively impact your credit score and can make it hard to obtain credit in the future.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is a reorganization, or adjustment of debt, for individuals who make enough to repay at least some of their debt each month.
Chapter 13 provides a court-supervised method for a debtor to pay back their creditors over a defined period of time, up to five years.
As a part of chapter 13 proceedings a debtor files a plan for repayment with their bankruptcy petition, or soon after, and payments on that plan must begin within 30 days of the beginning of the case.
These payments are made to an attorney general appointed trustee who in turn begins paying your creditors, after the repayment plan has been approved by the court.
Chapter 13 bankruptcy does not discharge debt but it can help you to catch up on missed mortgage or car payments.
The advantage of a chapter 13 filing is that it does not have the same long term credit impact as chapter 7 and you do not have to give up property, in fact, it may give you the chance to save your home or other property.
While an attorney may not be necessary to file for bankruptcy, an attorney can help you determine which bankruptcy option is right for you and help you navigate a tricky and highly involved process.
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