What is Bankruptcy?
Bankruptcy is likely the most drastic measure that you can take to get out of debt. It is also the option that will have the largest impact on your financial future.
There are two types of bankruptcy that apply to the average consumer. They are Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Both forms of bankruptcy will expose all your financials and assets, and a third-party lawyer working with the bankruptcy court for either repayment or liquidation will oversee the process.
How Does it Work?
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is essentially liquidating your assets and property to pay for outstanding debts.
Chapter 7 bankruptcies require the debtor to file a petition with a local bankruptcy court.
According to US Courts the debtor must file:
"Schedules of assets and liabilities, a schedule of current income and expenditures, a statement of financial affairs, and a schedule of executor contracts and unexpired leases.”
If the debts are mostly consumer debts i.e., credit cards, loans, mortgages, then the debtor must also file a credit counseling certificate, a credit counseling repayment plan, a proof of employment and/or wage earnings if any that was paid 60 days before the bankruptcy filing, along with expenses, monthly net income, expected increases in income, and lastly, “a record of any interest the debtor has in federal or state qualified education or tuition accounts.”
It is a complicated process, so a debtor may choose to employ a lawyer to oversee the filing.
If the petition is successful, the debtor’s non-exempt properties, which may include businesses, homes, cars, and jewelry are seized by the creditors and then sold off to pay for the debt. The federal government and states each have their list of exempt properties. This means that each state can determine what kind of property can be liquidated. If your possessions aren’t listed as exempt in your state, your creditors may choose to liquidate them!
Most debts can be discharged with Chapter 7 bankruptcy, but debts such as child support and alimony, some tax debts, guaranteed debts backed by the government such as student loans, debts accrued by malicious actions by the creditor, debts by personal injury or DUI, and debts from criminal restitution orders cannot be discharged through Chapter 7.
Does it Affect My Credit?
A debt consolidation loan has both positive and negative effects on your credit score. Your overall credit utilization will go down since you’re essentially opening up a new line of credit to pay off your credit and loan accounts.
Of course, if you continue to spend more than you can afford on your now debt-free credit cards, you’ll just have a huge credit consolidation loan on top of your debt due to bad spending habits.
An underwriter at a credit agency might also see your history of spending which led to you getting a credit consolidation loan, and flag you as a risky debtor, leading to receiving a poor credit rating.
Pros
discharge all qualifying debt.
Cons
A Chapter 7 bankruptcy mark will remain on your credit report for 10 years after filing date.
You may lose your most valuable possessions and properties to liquidation. This could include your home, automobile, jewelry/art, business and related equipment, as dependent on the state.
You may find it more difficult to apply for loans or credit accounts.
You may find it more difficult to apply to jobs for a private company if you have a bankruptcy mark against you.
How Does it Work?
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is essentially a repayment plan developed by your creditors and lenders that is overseen by a bankruptcy court in order to pay back debts, or bring you out of default.
Chapter 13 bankruptcies, like Chapter 7, require the filing of a petition to a local bankruptcy court. The filing must also include, according to US Courts, “ schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases, and a statement of financial affairs.
The Chapter 13 bankruptcy filing must also include a certificate of credit counseling, a copy of any debt repayment plan developed through credit counseling, evidence of employment and/or payment from employers if any received 60 days before filing, monthly net income and any increase in income or expenses after filing, and a record of any interest in state or federal qualified education or tuition accounts.
Along with this, “the debtor must provide the chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began).”
If the petition is successful, the debtor must pay all projected disposable income into the committed payment period, usually 3-5 years to the court appointed trustee.
These payments can either be direct payments i.e., written checks, or wages may be garnished instead.
Does it Affect My Credit?
Chapter 13 bankruptcy will stay on your credit report for 7 years after filing. Like Chapter 7, the impact a bankruptcy mark on your credit report lessens over time, it could make it difficult or near impossible to take out another loan or open credit card accounts since banks and lenders will see you as an unreliable borrower.
Pros
Discharge all qualifying debt.
Cons
A Chapter 7 bankruptcy mark will remain on your credit report for 10 years after filing date.
You may lose your most valuable possessions and properties to liquidation. This could include your home, automobile, jewelry/art, business and related equipment, as dependent on the state.
You may find it more difficult to apply for loans or credit accounts.
You may find it more difficult to apply to jobs for a private company if you have a bankruptcy mark against you.