Bankruptcy: When Debt Becomes Excessive and Unmanageable

Bankruptcy is a tough decision, and one that can come about for many reasons, with health care costs being one of the most common. Bankruptcy has both benefits and consequences that need to be weighed carefully, and it is important to find out as much as possible, especially in light of the new laws and regulations, before choosing bankruptcy as a means of dealing with debt.

Bankruptcy is a means of dealing with overwhelming debt in which the federal court system is used to resolve debt, typically through an initial selling off of assets, which are then divided among lenders, paying a portion of the debts and canceling the remaining amount or by restructuring or reducing the debt and setting in motion a repayment plan. When it comes to the average individual, the most common types of personal bankruptcy filed are Chapter 7 and Chapter 13. You may have many questions, and in this piece we discuss the basics.

How Chapter 7 and Chapter 13 Work

Chapter 7 bankruptcy requires that assets, with the exception of a few basic assets that are protected by law, to be sold and the money divided amongst creditors, who agree to the reduced amount, as recouping some is better than none. Then, the remaining debt, except for those that legally cannot be, such as child support, is eliminated and the debtor is no longer responsible for the outstanding amounts.

Chapter 13 bankruptcy operates a bit differently. The court assists in the restructuring of the debts and then, after means and income are accessed and proved, a repayment plan is developed. Usually, these plans are set for 3 to 5 years. The primary benefit to this plan is that it is possible to come out of it with your property.

While filing bankruptcy does have a negative effect on the credit rating, it is not as bad as it used to be, both because filing bankruptcy has become more common and because it is usually a once in a lifetime event. So, remember – if you must choose bankruptcy, it is not the end of the world, credit-wise.

Determining Whether to File Chapter 7 or Chapter 13

The type of bankruptcy that you can file is determined by specific regulations, which can vary from state to state. For example, you cannot file for Chapter 13 unless you have an income that can be determined to be steady and sufficient enough to abide by a court ordered repayment plan.

Recent changes in the law have had a significant affect on the process of bankruptcy, as well as the type of personal bankruptcy filings that you are eligible for. The income guidelines and requirements have become tougher. For example, some of those who may have in the past been eligible for debt elimination through Chapter 7 are now allowed only Chapter 13. Credit counseling is now one of the pre-filing requirements.

Credit counseling is a good idea anyway, and can offer an attractive alternative to filing for bankruptcy. Among other things, a credit counselor can help you negotiate a reduction of interest rates with your lenders, which will reduce the total amount owed, and they can also help to set up a repayment plan that will be satisfactory to the lenders and within your means to achieve. However, be careful of paying too much for credit counseling, as many places offer such services for free and many of the things that a credit counseling service will do for you, with a little knowledge and confidence, you can do for yourself.

When it comes time to choose a debt resolution, your best bet is always to study your options carefully, including bankruptcy, especially with the recent changes in bankruptcy law. In some circumstances, bankruptcy does make sense and can offer valuable protections as you make a new start towards a more healthy financial future.


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