Debt problems are among the most distressing issues people face today, with each threatening letter or phone call a further reminder of your plight. You weren’t always in this predicament, and the good news is that by making the right choices, and carefully following a plan, you’ll be in a position to put that debt – and its stress – behind you.
Know the options
If you’re thinking about bankruptcy, it’s essential to understand all the possibilities before moving forward. Since everyone’s circumstances are different, only a licensed, experienced attorney can assess the long-term ramifications of each option, and help avoid unnecessary risks.
In many cases, there are alternatives to bankruptcy; click to read more about them. It’s also important to know that there are two different types of bankruptcy for consumers to reduce or eliminate debt, and they work quite differently: Chapter 7 and Chapter 13
Chapter 7: Liquidation Bankruptcy
When someone simply doesn’t have the income or financial assets to pay off their debts, this option requires having a ‘trustee’ sell some or most of their property (heir car may be exempt if they are, or can get, current on their car loan). The proceeds are then used to pay their creditors. To qualify, the individual must pass a ‘means test’ to prove they cannot pay on their own.
It generally takes only three to five months to complete the process and to be free of outstanding debt.
Chapter 13: Reorganization Bankruptcy
Here, the person’s debt is reorganized, and typically reduced, in a way that requires them to pay a certain amount each month. If that court-mandated repayment plan is followed without interruption, they may be able to keep any property they own.
The individual becomes ‘debt free’ when they have made the last payment, which usually takes between three and five years.
Chapter 7 vs. Chapter 13: Consider all the pros and cons.
The two different types of bankruptcy each have their own advantages and disadvantages. With a Chapter 7 filing, you’ll be out from under faster, but you will have given up assets you had worked to acquire. This option may be more attractive to people in a lower income bracket, or who do not own a home that could be sold as part of the settlement.
Chapter 13 is a longer-term process, but allows you to keep possession of your property. It also offers the possibility of catching up on car or mortgage payments. Keep in mind that for both bankruptcy options, there are other details, considerations and eligibility rules that your attorney can help explain.