What is bankruptcy? It is a government sponsored debt relief option for individual consumers, in which there are 2 types - Chapter 7 and Chapter 13.
Chapter 7 - is an option which is also known as liquidation bankruptcy. Here, the borrower puts up their assets for sale, under the supervision of a court appointed trustee, to pay off unsecured creditors.
Advantages:
* Most cases are discharged and over in about 3 - 6 months.
* Provides borrowers with a "fresh start".
Disadvantages:
* Consumers can only file for Chapter 7 every six years.
* Its very difficult to qualify for it.
* Lawyers fees are included.
* One's credit is impacted for 10 years.
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Chapter 13 - is often referred to as reorganization/repayment bankruptcy. Consumers are not required to give up their properties for sale in this. They instead submit a payment plan to their lenders/creditors to be approved and be debt free in 3-5 years.
Advantages:
* One monthly payment
* Throughout the process, consumers are allowed to pay back all their late fees/accrued onsecured debts.
Disadvantages:
* Even though the payment is lowered, the consumers still have to pay in full.
* It will appear on the credit report for up to 7 years.
* It will show on legal records for 20 years.
* There is a high dropout rate associated with the process.
The Bankruptcy Time line:
Day 1 - Bank documents are filed with bankruptcy court.
Day 14 - Creditors are advised that a petition has been filed.
Day 20 to 40 - A meeting of creditors is held at the court (341 meeting)
Day 90 (after the 341 meeting) - Unsecured creditors must have filed their claims.
Day 60 - 90 (after the 341 meeting) - the debtor is discharged and all debts (with some exemptions) are written off.
Quick Q and A
What is new bankruptcy law?
The New bankruptcy law is also known as "Bankruptcy Abuse Prevention and Consumer Protection Act" BAPCPA and its purpose is to make it more difficult for people to file Chapter 7.
Why do I need to take the means test?
The means test is an objective income-based determination of whether an individual is presumed to be eligible for relief under Chapter 7 bankruptcy.
Does bankruptcy affect my credit report?
Yes, can have an impact on your credit report for up to 10 years and in most cases you may not able to get approved for credit at all during the first few years after you have filed for bankruptcy.
Is anyone free to choose between chapter 7 and chapter 13?
Based on new bankruptcy laws, individuals can no longer choose which chapter they want to file.
Can all types of debt be discharged when filling for bankruptcy?
In Chapter 7 bankruptcy, all of your debts will be discharged but while enlisted in Chapter 13, individuals can stop foreclosure proceedings. On the other hand though, the individual must still make all mortgage payments on time that come due during the Chapter 13 plan.
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