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Many people think filing bankruptcy is the easiest way out. Actually, you should avoid bankruptcy at all costs. Filing bankruptcy is the worst thing you can do to your credit. A bankruptcy can stay on your credit report up to 10 years from the day of filing bankruptcy. Credit grantors will consider your bankruptcy when evaluating you for a personal loan. You may receive credit but only if a predetermined amount of time has passed or the bankruptcy is no longer on your credit report. Attaining a loan after filing bankruptcy is difficult and could cost you more in interest rates and fees. In some cases, filing bankruptcy may be necessary. However, you should avoid bankruptcy if at all possible. A competent debt reduction company can help reduce your debts to an affordable level so you can avoid bankruptcy. For more information on bankruptcy, you may want to contact a bankruptcy attorney in your area or search online.
There are 5 basic types of bankruptcy cases provided for under the Bankruptcy Code, but for most consumers, there are really only 2 options, Chapter 7 and Chapter 13 bankruptcy. The cases are traditionally given the names of the chapters that describe them.
Chapter 7, entitled Liquidation, contemplates an orderly, court-supervised procedure by which a trustee collects the assets of the debtor’s estate, reduces them to cash, and makes distributions to creditors, subject to the debtor’s right to retain certain exempt property and the rights of secured creditors. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. These cases are called “no-asset cases.” A creditor holding an unsecured claim will get a distribution from the bankruptcy estate only if the case is an asset case and the creditor files a proof of claim with the bankruptcy court. In most chapter 7 cases, the debtor receives a discharge that releases the debtor from personal liability for certain dischargeable debts. The debtor normally receives a discharge just a few months after the petition is filed.
Chapter 13, entitled Adjustment of Debts of an Individual with Regular Income, is designed for an individual debtor who has a regular source of income. Chapter 13 is often preferable to chapter 7 because it enables the debtor to keep a valuable asset, such as a house. It is also favored because it allows the debtor to propose a “plan” to repay creditors over time—usually 3 to 5 years. At a confirmation hearing, the court either approves or disapproves the plan, depending on whether the plan meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from chapter 7, since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor action while the plan is in effect. The discharge is also considerably broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.
Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons (based either on the nature of the debt or the fact that the debts were incurred due to improper behavior of the debtor). The most common types of non-dischargeable debts are certain types of tax claims, debts not set forth by the debtor on the lists and schedules the debtor must file with the court, debts for spousal or child support or alimony, debts for willful and malicious injuries to person or property, debts to governmental units for fines and penalties, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for personal injury caused by the debtor’s operation of a motor vehicle while intoxicated, and debts for certain condominium or cooperative housing fees.
Filing bankruptcy begins by filing a petition in Federal bankruptcy court. You must file a statement of assets and liabilities as well as schedules listing creditors. Once you have finished filing bankruptcy, your creditors are prohibited from taking any action to collect discharged debts.
There are other negatives when filing bankruptcy. In chapter 13 bankruptcy, you may end up paying back 50% or more. If you miss a payment during chapter 13 bankruptcy, you could end up in breach of court and forced to pay all the debt. Filing bankruptcy limits your personal spending to items that the court considers essential. Also, the majority of debtors don't complete their chapter 13 bankruptcy repayment plans. Although most people filing chapter 13 bankruptcy assume they'll complete their plan, only about 1/3 do. A chapter 7 bankruptcy may stay on your credit longer than a chapter 13 bankruptcy. Here you would be paying nothing back to your creditors. If you own a home with significant equity, have assets to protect, or have co-signers to a loan, you probably cannot file chapter 7 bankruptcy. If passed, recent bankruptcy law proposals will make filing bankruptcy even more difficult.
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