Many people consider money to be the most stressful aspect of their lives. If you’re struggling to make ends meet, you may find yourself considering bankruptcy. You have several filing options, but the two main types of bankruptcy for consumers are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Also known as a straight bankruptcy, Chapter 7 is when you ask the court to forgive your debts in exchange for some of your assets. Most people contemplating bankruptcy choose this option because it provides a complete debt discharge. However, Chapter 7 may only be an option if your earnings are below the median income for your area. This tells the court that you don’t earn enough to repay your debt the traditional way while maintaining a minimum standard of living.
With Chapter 7, the court sells your assets—which could include your home and car—to repay as much of your debt as possible. Any remaining debt at the end of the process is canceled. Filing Chapter 7 bankruptcy stays on your credit report for 10 years.
Chapter 13 Bankruptcy
If you have a steady income and a mortgage, you may qualify for Chapter 13. This type of bankruptcy begins as a repayment plan. The debtor is granted the right to reorganize their debts into a single monthly amount to be paid over the next three to five years. Then, any remaining debt is discharged.
With Chapter 13, your assets are protected. You get more time to bring your mortgage up-to-date and stop foreclosure on your home. Still, you must agree to make monthly payments and follow a strict budget monitored by the court. If you file Chapter 13 bankruptcy, it will stay on your credit report for seven years.
Consequences of Bankruptcy
One reason to file for bankruptcy is to stop creditors from hounding you for money. Then, once the process is complete, your eligible debts will be discharged, giving you a chance to start over.
The downside is that your credit score will take a hit, and you could lose private property. Your personal financial information also becomes public domain, so future employers, clients, banks, and businesses can access the details of your bankruptcy. It may also take one to four years after the process is complete to qualify for a mortgage.
Limitations of Bankruptcy
While bankruptcy can prevent foreclosure, repossession of property, and garnishment of wages, it doesn’t erase all debts. In most cases, bankruptcy doesn’t cancel:
- Student loans
- Taxes, fines, penalties, and other debts to the government
- Alimony and child support
- Expensive purchases, such as a car, boat, or jewelry bought shortly before filing for bankruptcy
The Bankruptcy Code is large and convoluted, requiring in-depth knowledge and experience of the law. This means you need professional legal advice to decide if Chapter 7 or Chapter 13 is right for you. For a free consultation with a bankruptcy attorney in Chicago, please call Cutler & Associates at (773) 360-5802 today.