Some people who find themselves deep in debt feel that the only way out is filing for bankruptcy. This, however, is a very serious matter and is not a decision that should be made rashly. The debt elimination benefits of bankruptcy come at a high price.
When a person’s debt has risen to a level that they can’t hope to get under control, they may consider filing for bankruptcy. For a consumer there are two bankruptcy choices: Chapter 7 and Chapter 13. Chapter 7 bankruptcies involve wiping out the debts in part or in their entirety and liquidating assets to do it. Chapter 13 bankruptcies are more of a debt restructuring plan that gives you more time and a plan to pay back a portion of the debt that is owed to creditors.
Bankruptcy damages a person’s credit. A bankruptcy judgment stays on credit reports for as long as ten years. During that time, any credit that is applied for will disclose the bankruptcy to the creditor. If filing Chapter 13, you still have to pay back part of your debt and the judgment stays on your credit report for ten years.
Some people have turned bankruptcy into a way to easily get rid of debt without having to pay the money they owe. In some cases, individuals have filed for Chapter 7 multiple times in an effort to rid themselves of incurred debt.
At a bankruptcy hearing, a judge determines which assets need to be taken and which can be exempt from the bankruptcy process. These decisions are based off of laws that are different in every state. Since people know how the system works, some have tried to buy high price items with cash like cars and houses before a bankruptcy. That way, those possessions are not liquidated and the individual ends up paying very little to their creditors.
The new laws concerning bankruptcy have changed this. Whereas courts used to have the leeway of deciding who could file for Chapter 7 bankruptcy, there are now criteria that must be met first. In order to file for Chapter 7 bankruptcy, a person has to have an income that is below the median income for the state where they live. Their income must be put through a calculation that determines if they have enough disposable income to pay twenty-five percent of their outstanding debt.
These changes have made it so that more people file for Chapter 13 bankruptcy. In these proceedings, the court take into consideration a person’s financial situation and their debt in order to determine how much money they are realistically able to pay. Necessities like a rent or mortgage payment and utility bills are calculated and compared to standards that the IRS has set for Chapter 13 bankruptcy filers. After this, the actual amount to be paid is determined and the rest is considered exempt.
Now that the bankruptcy process has become more complicated than before, lawyers are charging more to handle the proceedings involved. The extra cost involved also makes people think about their situation seriously before filing. Credit counselors can help you to make a plan for getting rid of debt without going through the bankruptcy process.
Bankruptcy is not a simple or cheap process and should only be used when all other efforts at eliminating debt have failed since bankruptcy causes long term damage to your credit.
