Understanding Personal Bankruptcy
If you find yourself overwhelmed with debt and unable to pay your bills, you may be able to file for bankruptcy. The purpose of personal bankruptcy (which is different than business bankruptcy) is to allow you to discharge some or all of your debt and get a fresh financial start.
There are two types of personal bankruptcy, called Chapter 7 and Chapter 13. While both types will help you alleviate your debt, the way they do it differs significantly. It’s important to remember, however, that filing for bankruptcy is not a magic wand that will suddenly make all your financial problems go away. In addition, filing for bankruptcy will almost certainly have a long-term negative impact on your credit history and ability to qualify for credit.
What Happens When You File For Personal Bankruptcy
Both types of personal bankruptcy are filed in civil court. When you file, the court issues an order–called an “automatic stay”–that immediately prohibits debt collectors from contacting you. This includes collection actions like:
- Creditor calls and letters
- Vehicle repossessions
- Wage garnishments
- Lawsuits seeking monetary reimbursement
While helpful, an automatic stay is not necessarily permanent. In some cases, debt collectors can ask the court to “lift the stay” so that they can continue to proceed with their attempts to collect the money you owe them. This is most common in home foreclosures where the homeowner can’t bring their payments current, and the mortgage lender sells the house to recover the loan.
What Type Of Debts Does Bankruptcy Eliminate?
Filing for personal bankruptcy will eliminate many, but not all, of your debts. Common debts incurred by most people that bankruptcy can eliminate include:
- Credit card debt
- Medical bills
- Utility bills
- Personal loans (e.g. payday loans)
- Membership agreements
Filing for bankruptcy will not, however, relieve you of your obligations to pay for spousal support and/or child support. It also does not cover any past-due taxes you owe, student loan debt, and any fines you owe the government.
Chapter 7 vs Chapter 13 Bankruptcy
Before filing for bankruptcy, you’ll need to choose which type of personal bankruptcy is best for you, either Chapter 7 or Chapter 13. Each type has different requirements and solves particular debt problems. The chapter you choose will heavily depend on the following factors:
- How much debt you have
- How much money you make
- How much property you own
For instance, those with low-to-average income can file for Chapter 7 bankruptcy and discharge particular types of debt without paying into a monthly repayment plan. Those with higher incomes must pay back a portion of their debt over a 3-5 year Chapter 13 repayment plan.
Speak With A Financial Planner First
Filing for personal bankruptcy should only be done as an absolute last resort. Before going down that road, consider speaking with an experienced financial planner first. Because personal bankruptcy has such a big impact on your financial life and future, you should take all steps to avoid it if possible.
A financial planner may be able to help you identify ways to begin repaying your debt and get your financial life back on track without having to file for bankruptcy. To learn more, please contact us today for a free financial planning consultation.
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