The Different Kinds of Bankruptcy
There are different types of bankruptcies, each with its own rules and procedures. If you are considering filing for bankruptcy, it is critical that you understand the different types so that you can determine which one is best for you.
This article will discuss the different types of bankruptcies and their benefits and drawbacks.
Some amendments to the US Bankruptcy Law took effect on October 17, 1995. In the past, anyone who wished to file for bankruptcy because borrowers couldn’t pay off creditors could file without questions. Today, however, there are some procedures that you must go through before debtors can get their debts discharged.
Things to do before filing for any types of bankruptcies
First, a person needs to complete a credit counseling course with an accrediting agency before the borrower can proceed with the filing.
Borrowers may receive advice during credit counseling to seek alternative solutions such as debt consolidation or debt settlement. If the counseling agency recommends bankruptcy as the best solution, then that’s the time borrower can start the preparations for bankruptcy.
Consumers can file for bankruptcy under two types of chapters: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy
A chapter 7 bankruptcy is a liquidation bankruptcy. The trustee sells the debtor’s nonexempt assets in a Chapter 7 bankruptcy to pay creditors.
The debtor is then free of all personal liability for the debts.
A Chapter 7 bankruptcy may be an option for someone with few or no assets and who owes more debt than the debtor can pay.
Advantages of Chapter 7
Fresh Start: Freedom From Debt
One of the most significant benefits of filing for Chapter 7 bankruptcy is that it allows people to start over. It means they can begin again with a clean slate and no debt. It can be highly beneficial to those who have been struggling financially for a long time.
Protection From Creditors
When filing for Chapter 7 bankruptcy, an automatic stay goes into effect. It means creditors will no longer contact you or collect any debts owed.
No wage garnishment
By erasing your debts, Chapter 7 bankruptcy can help you avoid wage garnishment. It means that your creditors will no longer deduct funds from your paycheck. It can be a huge relief, especially if you’re having trouble making ends meet.
Property Exemptions
One advantage of Chapter 7 bankruptcy is that it allows you to keep your property. In most cases, creditors will not be able to seize your property. It means you can keep your house, car, and belongings that are necessary for your day-to-day survival.
Disadvantages of Chapter 7
Can’t discharge certain debts
Chapter 7 bankruptcy is a well-liked solution for those who struggle with debt. However, this kind of bankruptcy does have some drawbacks.
One of them is that there are some debts that you cannot discharge. It includes Taxes, child support, and student loans.
Affects credit score
A Chapter 7 bankruptcy will remain on your credit report for ten years. Due to this, it may be hard to get approved for a loan or a mortgage.
Asset liquidation
In a Chapter 7 bankruptcy, the debtor’s assets are all liquidated to pay off creditors. It includes nonexempt assets like money, stocks, and real estate.
Chapter 13 bankruptcy
Filing for Chapter 13 bankruptcy may be an option if you are completely indebted. While creating a payment plan that will enable you to repay your creditors over time, this sort of bankruptcy allows you to preserve your property.
However, it’s crucial to remember that not everyone qualifies for Chapter 13 bankruptcy. Your salary must be below the median for your state in order to qualify, and you must have enough discretionary money to pay your creditors.
Advantages of Chapter 13
Keeps your assets
Consumers who file for Chapter 13 bankruptcy can keep their assets while repaying their debts over time. It can be an excellent option for those who have valuable assets to protect.
Reorganize your debts
Chapter 13 bankruptcy allows you to consolidate your debts into a more manageable payment plan.
Creditor Protection
Chapter 13 can offer some relief from creditors who are harassing you for payment.
Disadvantages of Chapter 13 Bankruptcy
The process might take a while
One of the major drawbacks is that you have to pay your creditors every month for three to five years.
Missed Payments
It is possible to dismiss your case if you fail to make a payment, and you could lose your bankruptcy protection.
Costly
It may be more expensive than other options because you must pay your lawyer and trustee fees.
Bad Credit
One major drawback is that you’ll probably see a drop in your credit score, which makes it even more difficult to obtain loans or credit cards in the future.
Remember that only Chapter 7 discharges the borrower completely from debt repayment. Meanwhile, Chapter 13 subjects the borrower to a 5-year mandatory repayment program.
How does the bankruptcy court decide which Chapter of bankruptcy is appropriate?
The applicant will be required to take the Income Means Test Calculation to determine whether the borrower is still capable of repayment.
If the borrower’s income means test result falls below $6,000, the borrower is eligible for Chapter 7 bankruptcy.
However, if the result of the income means test is $6,000 or more, the borrower is eligible for Chapter 13 Bankruptcy.
Under the 5-year repayment plan, 10% of the borrower’s monthly salary will be deducted automatically as debt payment.
Other Types of Bankruptcies
Other Chapters of Bankruptcies are chapters 9, 11, and 12. Chapter 9 is a bankruptcy provision for municipalities, public agencies, or a group of people.
Chapter 11 is bankruptcy is a provision for business corporations.
Lastly, Chapter 12 bankruptcy is for family farmers and fishers. If you are a farmer or a fisherman, you can file for Chapter 12 bankruptcy and avoid asset liquidation. That means a farmer or a fisher can retain his assets or livelihood after being discharged from his debts.
The three different types of bankruptcies are Chapter 7, Chapter 9, Chapter 11, Chapter 12, and Chapter 13. Each type of bankruptcy has its own advantages and disadvantages, so it is critical to understand what each entails before making a decision.
If you are considering bankruptcy, you should consult with an attorney who can help you weigh your options and choose the best path for you.
