When you start to feel overwhelmed by your debts, bankruptcy may be one of the first options that you think of. In reality, bankruptcy is only one of many methods for getting rid of debts. It’s a good idea to understand what’s involved in the bankruptcy process so that you can identify whether or not it’s right for you.
Two types of bankruptcy
When it comes to filing for bankruptcy, there are two main types. Chapter 7 bankruptcy is the most common type that individuals file. In this instance, a trustee is appointed by the federal court. They will handle the selling of your property and use the proceeds to help partially repay your creditors. After all your assets are sold and the proceeds are properly disbursed, the remaining debts will be discharged. With Chapter 7 bankruptcy, the court will exempt some of your assets from liquidation. These exemptions may be your household goods, clothing, tools of your trade, pension and even your car.
Chapter 13 Bankruptcy is the second type of bankruptcy that you can file. With this type of bankruptcy, you’re given a court-approved plan to repay all or most of your debts over 3 to 5 years. During this process, some of your debts may be discharged. One benefit of Chapter 13 bankruptcy over Chapter 7 bankruptcy is that you do not need to liquidate your assets as long as you continue to make the agreed-upon payments.
Consequences of bankruptcy
While it may seem advantageous to file for Chapter 7 bankruptcy to help discharge a lot of your debts, there are many consequences that come along with bankruptcy. The first major consequence is that your credit score will be damaged for 7 years. Most lenders will not give out loans to individuals who have a bankruptcy on their credit report. In addition, you can expect to pay higher rates for things like insurance, as bankruptcy is one key factor that will make you look riskier than other policyholders.
Making the decision to undergo bankruptcy is a big one. It’s always advisable that you speak to an attorney before making the decision to do so. They can assist you in determining whether or not bankruptcy is actually right for you and what type of bankruptcy you should file for.