It’s very difficult for anyone to have to deal with mounting debt problems. In the worst of circumstances, debt can cause problems in all facets of the debtor’s life. Fortunately, the U.S. government does provide U.S. residents with a viable way to deal with their debt issues.
If you are feeling your debt walls closing in on you, the last thing you want to do is panic. While keeping your head about you, it might benefit you to know that you do have the option of filing for bankruptcy protection. While it might not be the best way to handle your problem debt, it might be the most effective option you have at your disposal.
Assuming you have little to no experience with bankruptcy, you need to understand there are two options, one being Chapter 7 and the other being Chapter 13. While both of these options can offer debt relief, they do so in different ways. The path you would choose depends on a lot of factors, including your personal preference and some factors set by law. It’s worth noting that some federal bankruptcy laws use state guidelines to help determine each filer’s path to bankruptcy.
You might be questioning, “which is better chapter 7 or chapter 13?” In all honesty that depends on your objectives and individual circumstance. However, you should always consider bankruptcy as a last resort because of the impact it will have on your credit.
In the two sections below, the discussion will center on the attributes of each type of bankruptcy. You can use this information as a means of comparison to help you decide in which direction you wish to go.
Chapter 7 bankruptcy is also known as liquidation bankruptcy. If granted by the courts, it discharges all applicable debt as allowed by law. To qualify for a Chapter 7 filing, you would need to pass a means test and fall below certain minimum income guidelines. What is the income limit for filing chapter 7? That would depend on your state’s median income.
For what it’s worth, a few of the debts you cannot have discharged include:
- Child support
- Alimony payments
- Certain types of tax obligations
What happens after filing chapter 7? Well, you would need to gather a lot of financial documentation to present to the court. The documentation would need to paint a picture that supports your contention you cannot possibly handle all of your debt.
As is the case with any other legal action, filing Chapter 7 has its advantages and disadvantages. The advantages include the following:
- All applicable debt is discharged and your debt load is lifted
- Gets you relief from debt collectors even during the filing period
- It’s a faster way to clear debt than Chapter 13
Meanwhile, there are two disadvantages that are worthy of note. First, you could lose some of your assets. The list of exposed assets includes cash, stocks/bonds/precious metals, expensive jewelry, some real estate assets (not the primary home unless it carries extraordinary value), and vehicles over a certain valuation. No one is going to show up with a truck to pick up your personal assets.
The other disadvantage would be the impact your Chapter 7 discharge would have on your credit rating. The impact would be significant and could affect your ability to secure credit, a job, or a place of residence for up to 10 years. With that said, there are things you can do during that 10 year period to improve your credit.
If approved, your qualifying debts are discharged, assets are distributed to creditors, and you move forward and try to deal with your remaining financial issues.
If you own significant assets, Chapter 13 would be the proper bankruptcy option. This would also be the alternative should you not qualify for Chapter 7 based on the means test.
Chapter 13 works under the assumption you do have enough monthly income to manage at least some of the debts. If granted approval for your Chapter 13 bankruptcy filing, you would get an opportunity to work with a court-appointed administer who would help you put together a three to five-year repayment plan that covers all applicable creditors.
As is the case with Chapter 7, a Chapter 13 filing does come with advantages and disadvantages. As for the advantages, it affords you the opportunity to do the right thing and honor your debts. That can create within you a sense of pride that you did the honorable thing. You would also benefit by having most of your creditors are stalled from collection efforts, which would likely take a lot of burden off of your shoulders.
On the negative side of the ledger, you would be under the gun for three to five years to fulfill your repayment obligations. That can still create a lot of stress. Should you hit a rough stretch where you weren’t able to meet the obligations under your repayment plan, you could lose your Chapter 13 status. That could eventually result in the loss of some of your assets.
Another disadvantage would be the impact your bankruptcy would have on your credit. While the hit might not be as significant as the hit you would take with a Chapter 7 filing, you would still get a black mark that would last 7 years on your credit report. Again, there are things you can do during that 7 year period to improve your credit.
What Happens After Chapter 13 is Paid Off?
Well, your credit should continue improving until your statutory 7-year waiting period is over. From that point on, it’s up to you to continue working on maintaining your financial stability. A lot of people have gotten through the Chapter 13 bankruptcy process to go on to great financial success. It’s just a matter of making better financial decisions.
If you are at the point you think bankruptcy might be the only solution to your debt problems, you should talk to an expert. In fact, there are numerous avenues you can explore to fix your debt problems. For example, firms like Harris & Partners offer help on consumer proposals, which is where you negotiate with your lenders to grant you a longer time to pay off your debt, or to allow you to pay back just part of the debt.