Bankruptcy can provide many benefits for those unable to pay their debts, but there also potential drawbacks that must be considered before proceeding. It’s important for people to understand the difference between chapter 7 or chapter 13 and the relative merits of each.
Stopping Collection Activity
An important advantage is regardless of which chapter you file under, your creditors must immediately cease all collection activities once you file your petition with the court.
This “automatic stay” stops any foreclosure proceedings, liens, wage garnishments, repossessions, and so forth. However, the automatic stay is not bulletproof. Secured creditors–like the bank holding your mortgage or car loan–can ask the court for relief before your case is completed.
Liquidation vs. Consolidation of Debts
One key issue to understand is chapter 7 is intended to discharge (eliminate) most of your existing debts by liquidating some of your assets, while chapter 13 helps you come up with a plan to pay off your creditors over an extended period of time. If you don’t own much property and don’t anticipate earning enough to pay off your creditors even with a payment plan, then chapter 7 will probably work to your advantage. The bankruptcy court will discharge most of your debts.
If, however, you have significant property that you wish to protect such as your home, than chapter 13 may be the more attractive option. Under chapter 7, the court can seize all of your property outside a specific list of exempt items. A trustee appointed by the court takes possession of this non-exempt property and sells it to pay off your creditors.
In a chapter 13 case, you can often save valuable property for example, you may be able to stop foreclosure of your home by negotiating an agreement with your creditors to pay off any outstanding debts. Chapter 13 functions much like a debt-consolidation loan, only it is overseen by a federal bankruptcy trustee instead of a private lender. Under a chapter 13 plan, you would make payments to the trustee, who in turn would deal with your creditors.
Debts That Are Not Dischargeable
Before proceeding with a your petition, you must be aware that certain types of debt are protected from discharge under federal law. These include:
- Child support
- Student loans
- Certain tax debts
If most of your debts fall under these non-dischargeable categories, than this option probably is not to your advantage.
Long-Term Impact on Your Credit
Most people wonder, “How will my credit be affected?” There’s no set answer to that question. As a matter of law, bankruptcy can remain on your credit report for up to 10 years. This can affect your ability to secure new credit cards, obtain a mortgage, or even get a job. But any future uncertainty should be weighed against your present circumstances. If you’re already in debt to the point where this is an option you are considering we can help you start over.
As with any legal matter, it is essential to consult with an experienced bankruptcy attorney before proceeding.