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Wednesday, March 18, 2015

Different types of bankruptcies and their consequences

Filing for bankruptcy
Chapter 7 bankruptcies stay on credit records for up to 10 years
By Brian Levesque

There are a lot of misconceptions about filing for bankruptcy, and I think much of that can be blamed on the fine folks at both Hasbro and Parker Brothers with their beloved board game Monopoly. For many of us, forking over our last white $1 bill after landing on Park Place is the extent of our experience with bankruptcy. From an early age, bankruptcy carries a negative connotation and is often associated with financial failure. 

This is a misguided viewpoint since the fundamental goal of bankruptcy is to give the honest, yet unfortunate debtor an opportunity at a new life clear of the pressures of preexisting debt. Much like losing all your cash on an unlucky roll of the dice, real life bankruptcy is often due to misfortune. 

The different types of bankruptcy are useful tools for both individuals and businesses who are trying to get back on the path to financial peace. This passage will focus on the troubled individual rather than a business fallen on hard times, though it is worth noting that the filings for business bankruptcy, though covered under different parts of the overall law, function similarly. Regardless of which filing is pursued, the matter should be discussed at length with experienced, professional bankruptcy attorneys like those at Weik Law Office.
Some terms to help better understand Bankruptcy Code:
  • Debt adjustment - The arrangements made for the repayment or satisfaction of debts in an amount or manner that differs from the original arrangements
  • Dischargeable debts - Debts that can be erased by going through bankruptcy
  • Nondischargeable debts - Debts that cannot be erased by filing for bankruptcy
  • Lien - A charge or encumbrance upon property for the satisfaction of a debt or other duty
  • Secured debt - A debt on which a creditor has a lien
  • Unsecured debt - A debt that is not tied to any item of property

Chapter 7

When an individual talks about filing for bankruptcy, they are often referring to Chapter 7 Bankruptcy. Those who select Chapter 7 bankruptcy do so because they have little to no hope of ever being able to repay the debts. In a Chapter 7 filing, a trustee sells off all non-exempt assets held by the debtor so that the debts can be repaid to the fullest extent possible. After filing, creditors aren’t allowed to collect directly from you. When assets have been liquidated and creditors have been paid, the rest of your debts are cleared and you're no longer responsible for them. But not all debts can be cancelled, examples of debts that will remain after a Chapter 7 filing include: alimony, child support, criminal fines, student loans, back taxes from last 3 years, recent large purchases, and property contracts with liens.

Chapter 13

This form of bankruptcy is also available to individuals who have a regular income and a reasonable expectation to be able to pay back some or all of the secured debt owed. Examples of these secured debts include a home or auto loan. The goal of Chapter 13 is to resume regular monthly payments over time. Unsecured creditors are paid a portion of what is owed depending on the individual’s income and the amount and nature of the debt. Any back taxes are still paid in full along with secured debt, alimony, child support, criminal fines, and student loans.

Chapter 12

Similar to Chapter 13, Chapter 12 is available specifically to farm owners who have landed on harsh times. In this filing the debtor still owns and controls his assets and works out a repayment plan with his creditors.
In all cases getting a future loan of any kind will be extremely difficult for at least the following few years. While maintaining employment and paying bills on time will help raise your score, any loan you may secure in the following years will be at very high rates having filed. For larger purchases, such as a home or car, getting a loan will be nearly impossible for many years. These consequences will remain for ten years under a Chapter 7 filing. If you go the route of a Chapter 13 filing, those effects will remain on your credit report for a period of 7 years. Remember that bankruptcy is not the end of the world -- it is a tool that can be used to get your life back on track. You won’t be able to tackle this process alone, and finding the right attorney to work on your behalf is the first step to resuming a peaceful financial life.

About the author: Brian Levesque is a freelance writer who brings his experience and analysis to a variety of topics affecting the business world and current affairs.

Image: Dave Dugdale; CC BY-SA 2.0