A lot of people think that going through the process of filing for bankruptcy is a good way to quickly and easily erase all of their debt. While bankruptcy can be a good financial strategy for people with certain kinds of debts, it is important to know some basic facts about bankruptcy before filing. To start, there are three main types of bankruptcy, Chapter 7, 11, and 13. There are a lot of differences between these three types of filing.
Chapter 7 bankruptcy is designed to help individuals who need to completely wipe out their debts. This type of bankruptcy is the hardest to qualify for, but it also can eliminate the most debt. While the exact laws that determine who qualifies vary from state to state, it is generally true that people applying for Chapter 7 have to show that their income is too low to enable them to pay back their debts within a reasonable period of time.
Chapter 7 can be a good way to completely eliminate unsecured debts. Credit cards, payday loans, and medical debt are usually totally erased without having to make further payments or sacrifice assets by a Chapter 7 filing. If a person wants to include secured debts, however, it is possible that the law will require them to sell the asset that the loan secures. For example, a person who wants to include their car loan debt might be required to sell their vehicle. It is important to note that the exact laws vary from state to state, so it might be a good idea to contact a bankruptcy attorney before filing.
Chapter 11 is meant for businesses. This type of bankruptcy can only be filed by businesses that need to discharge or restructure their debts. It cannot be filed by individuals.
Chapter 13 is meant for individuals who need to restructure their debts. This type of bankruptcy is usually required of people who have a sufficient income to make some type of payment on their debts. When filed, a judge will review the filing and approve or suggest modifications to a new debt payment plan. Typically, these plans last about five years and will partially or completely pay off the debt.
Under a Chapter 13 filing, a debtor might be required to sell more of his or her assets than he or she would under a Chapter 7 filing. In order to pay some unsecured debts, it might be necessary to sell jewelry, electronics, antiques, or other belongings.
Finally, it is important to note that some types of debt cannot be discharged in a bankruptcy. Student loans, tax debt, and child support are three examples of debt that can hardly ever be erased by filing, no matter what type of bankruptcy is being filed.