A new federal law about bankruptcy came into effect in November 2005. It has become somewhat more difficult for debtors to get rid of debts ever since then. The law requires that a person in debt must address a professional debt management or debt consolidation company prior to filing for bankruptcy. The debt management or debt consolidation company must first review the financial situation of the debtor and see if there is a way he can restructure his debts, or create a repayment plan on better and more affordable conditions in order to pay out his debts. Only in case an accredited debt consolidation or debt management company makes a statement that there is nothing that can be done to repay the debts, the debtor may file for bankruptcy.
There are the main two articles according to which a debtor can file for bankruptcy – Chapter 7 and Chapter 13.
First, let us see some facts about bankruptcy and its effect on your situation. If we exclude from the number of reasons leading to bankruptcy some causes that do not depend on us, like sudden illness, death, divorce, or accidents, then you should know that bankruptcy is the last resort a person in debt should turn to. You should know that bankruptcy remains on your credit report for ten years or more. And you know how important your credit report is – all lenders and banks base their decisions on your credit report – whether they approve or disapprove you, give you a low or high interest rate. If you see an ad stating that past bankruptcy is not a problem to get a loan – they really mean it’s no problem if you are ok with paying 23-29 percent of interest rate.
Now, let’s discuss the bankruptcy chapters.
Chapter 7 Bankruptcy
This Chapter 7 Bankruptcy is most commonly used by individuals. It gives you a way to erase debts and start a new debt free life. Chapter 7 bankruptcy requires the debtor eliminates all non-exempt assets. You can file for bankruptcy using this chapter if you don’t have enough income after deducting basic expenses to pay out your debts. Chapter 7 does not allow you to file for bankruptcy on alimony debts, child support, student loans, recent large purchases and back taxes.
Chapter 13 Bankruptcy
If you do not qualify for Chapter 7 Bankruptcy, you are left with Chapter 13. It allows you to stick to the repayment plan approved by court in order to pay out all or a part of the debts. You get the restructured payment schedule that will take you 3-5 years to pay off your debts.
Both Chapter 7 and Chapter 13 bankruptcy stops all legal actions and charges against you on your pre-bankruptcy debts, all foreclosure proceedings are also ceased. The court appoints a trustee to work out a repayment plan.
However, some states do allow creditors to demand you pay out your debts after you file for bankruptcy, so check this in our database.