Most people think that these three statements sum up a bankruptcy:
- When you file bankruptcy protection you lose almost everything that you have including your home, your car and all of your property in order to pay off your debts.
- The bankruptcy erases all of your debts.
- The road following bankruptcy is a long and arduous one. You have to start from the bottom financially in order to re-establish your credit rating.
These statements are all true, to a point. Read on to learn more.
Two Types of Bankruptcy
There are two types of bankruptcies in the United States. There is the Chapter 7 bankruptcy and the Chapter 13 bankruptcy. The circumstances described above characterize a Chapter 7 bankruptcy for any given person. The U.S. Bankruptcy Code also includes provisions for a Chapter 13 bankruptcy for an individual as well as bankruptcies that are geared towards businesses.
Before deciding to file for bankruptcy you should consider your alternatives. These include:
- Finding ways to earn more money and/or spend less to pay off debts
- Applying for a debt consolidation loan
- Obtaining a debt management plan by way of credit counselling
The Difference between a Chapter 7 and Chapter 13 Bankruptcy
When you file for a Chapter 7 bankruptcy practically all of your assets need to be sold in order for your debts to be repaid. On the other hand, a Chapter 13 bankruptcy is often referred to as an “Adjustment of Debts.” What this means is that a repayment arrangement is set over an extended period of time. What these two types of bankruptcies have in common is the ending- both come to a close with a bankruptcy discharge. At this point the debts are gone and the person must start on the road to financial recovery.
When a Chapter 7 bankruptcy is filed, the debtor must surrender all of his property to an attorney that has been assigned to the case. It is the attorney’s job to take the property and convert it into cash value in order to pay money to the creditors. There is sometimes property that is exempt from this procedure. These items are called “exempt assets.”
A Chapter 13 bankruptcy is geared towards those who want to pay back their creditors in full but need a more substantial period of time to do so. In this case the debtor is not expected to sell any of his assets. When it comes to this kind of bankruptcy, bi-weekly or monthly payments are made to the creditors. The amount of the payments is determined by how much the debtor can afford to pay after all necessary living expenses have been accounted for.
Be aware that a Chapter 7 bankruptcy is the best option for bankruptcy for an individual who has little if any assets and a modest income. When there are no assets involved, filing is a very basic procedure. However if a person is making an above average income and is able to repay a portion (if not all) of his debts, then he may have to file for Chapter 13 bankruptcy instead. In this case, a Wage Earner Repayment Plan will be put into play.