When bills are overwhelming, people feel like they are drowning in financial worries. The phone rings with a creditor on the other end, demanding a date for payment. When the money isn’t there, many turn to bankruptcy as a solution. The pros and cons of bankruptcy should be carefully considered before making a final decision.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy gives people an opportunity to wipe out their debts to get a fresh start. Also referred to as a straight bankruptcy, all non-exempt property is turned over to a bankruptcy trustee. The property is converted into cash to payoff creditors. The debtor gets relief from debts that are permitted to be discharged within about three to six months. Often these debtors have little to lose and their major concern is to eliminate the pressure of debts they cannot cover.
Pros of Chapter 7 Bankruptcy
There are several advantages to choosing Chapter 7 bankruptcy. The amount of debt that is erased is unlimited. After the debtor’s assets are distributed, all other unpaid debt balances are discharged so the debtor no longer owes money. While large debts can be erased, there is no minimum amount of debt required to claim Chapter 7 bankruptcy.
This type of bankruptcy is beneficial to people with both large and small debts based on the ratio of their income and assets. Also, the wages earned and property acquired after Chapter 7 bankruptcy is filed belongs to the debtor with the exception of inheritance proceeds. Typically, a Chapter 7 proceeding takes about four months so debtors gain quick relief from the stress of outstanding debts.
Cons of Chapter 7 Bankruptcy
While there are many pros to claiming bankruptcy, there are also a few cons. After the case is closed, some debts may continue such as mortgage liens. Foreclosure proceedings are temporarily stalled by filing bankruptcy but may not be released. Each situation is different and based on the decision of the bankruptcy trustee. Debtors should check with an attorney if they want to get out of a mortgage they cannot afford.
With Chapter 7 bankruptcy, certain non-exempt property is sold by the trustee. When debtors must give up property, some feel violated by the loss. If the debtor had co-signers on loans, they still owe the money unless they also file for bankruptcy protection. Filing for Chapter 7 bankruptcy has a negative impact on the debtor’s credit rating for two to ten years. Finally, Chapter 7 bankruptcy can only be filed every eight years. Debtors must act conscientiously and avoid debts they cannot afford after the bankruptcy is finalized.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is typically for people looking to pay off their outstanding debts. Also referred to as reorganization bankruptcy, the bankruptcy trustee creates a schedule for the debtors to pay off creditors over a period of three to five years. For people with non-exempt property they don’t want to lose, this can be a viable option. However, the debtor must have stable income that is enough to cover basic expenses and payoff the outstanding debts according to the schedule. For those who are financially devastated, this might not be the best choice. It is essential to consider the cost of everyday life and rising costs versus potential income over the next few years.
Pros of Chapter 13 Bankruptcy
One of the major pros of claiming Chapter 13 bankruptcy is debtors keep exempt and non-exempt property so they experience no major losses. Debts are repaid within three to five years, buying the debtor more time to cover them. Once the Chapter 13 bankruptcy is filed, debtors are protected against their wages being garnished. They also have the relief of being protected against collectors. Those facing the loss of their home are also protected against foreclosure.
When Chapter 13 bankruptcy involves complete payment of debts, co-signers on loans are protected against creditors. This saves the debtor embarrassment and lost relationships over money problems. On the other hand, if co-signers are still responsible for the loan, an adjusted percentage of payment is worked out.
Also, if a Chapter 7 bankruptcy is filed and liens remain, a Chapter 13 bankruptcy can be filed to make arrangements to pay them off. Unlike Chapter 7, there is no limited to the number of times Chapter 13 bankruptcy can be filed.
Cons of Chapter 13 Bankruptcy
Chapter 13 bankruptcy has a few cons. The debtor’s disposable income is used to pay off debts so their money is tied up for a few years. The debt goes on and continues to be a source of stress and financial concern. Typically, legal fees are higher as there are more details involved with Chapter 13 bankruptcy.
After Chapter 13 bankruptcy is closed, some debts may remain. The debtor is responsible to keep paying them off. There is also a maximum amount of debt to file for Chapter 13 bankruptcy. People with debts over $1,000,000 usually do not qualify for this relief. It depends on the amount of secured and unsecured debt.
Whether a debtor files Chapter 7 or Chapter 13 bankruptcy, they lose all credit cards unless they are completely paid off prior to filing. Obtaining a mortgage usually impossible for about five years. It is harder to get any type of credit, qualify for certain jobs or purchase life insurance. On the plus side, debtors no longer face the actions or harassment of creditors. Most are able to keep essential property such as a vehicle for transportation, home goods and a home while making a new start.
What Are Exemptions?
Certain debts are exempt from Chapter 7 bankruptcy so the debtor can keep them such as a home, land and some equity, vehicle, business equipment, pension and insurance, some jewelry, clothing, appliances, furniture and public benefits. The court allows the debtors to keep basic items to carry on with everyday life after bankruptcy. Certain items might not be exempt such as vacation homes, family heirlooms, collectibles, bank accounts, cash, bonds, stocks and additional vehicles.
Debts That Live On
Some debts are not wiped by by Chapter 7 bankruptcy. After filing, a 341 meeting with creditors is scheduled by the trustee of the bankruptcy court. All debts that are not included on the creditor list are not part of the bankruptcy. Debtors must carefully review what they owe prior to filing. Other debts that may continue include student loans, damages for injury, child support, alimony, certain luxury consumer debt and cash advances, certain taxes, governmental penalties, personal injury debt and credit obtained on false pretenses.
While debtors are allowed to file bankruptcy on their own, it is wise to consult with an attorney to verify rights, exemptions, non-exemptions and current rules. Claiming bankruptcy may impact credit, but that is what brought the debtors into problems in the first place. In most instances, bankruptcy provides sweet relief from debt and a chance to start over.