When your financial crisis reaches a point of extreme desperation and you find that other debt relief options have failed, your last resort would be to file for bankruptcy. You have the choice to file for either Chapter 7 or Chapter 13 bankruptcy. Although a lot of people find this an embarrassing ordeal, this could be a humbling move to regain a debt-free life gradually. For those who are curious, here are the pros and cons of bankruptcy you need to know.
How to Qualify for Chapter 7 or Chapter 13 Bankruptcy
Before filing for bankruptcy, you have to grasp the true nature of it. For one thing, you have to identify whether you would file a Chapter 7 or Chapter 13 bankruptcy. To qualify for either of these types, you have to undergo the Means Test which would assess if your income falls below or is beyond the nominated income level in the state where you are currently residing. If it falls below the nominated income level, then you may file for a Chapter 7 bankruptcy. On the other hand, if your income is beyond the median income level, then you go for Chapter 13 bankruptcy.
For your further understanding of the differences between the two, here are the pros and cons of filing Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
No. 1: It eliminates unsecured debts.
It helps you eliminate unsecured debts such as personal loans, credit cards, utilities, old phone bills, medical bills, and others. This is beneficial if you have high amounts of debt in these areas.
By the time you file this type, the court protects you and prohibits your debt collectors from continuously calling you, suing you, re-possessing your property or filing you a lawsuit.
No. 3: It takes effect quickly.
Filing for this type takes effect quickly after the court approves.
No. 4: It protects your house and car.
This one is the more favored type of bankruptcy because this one has the power to protect your house and your car, especially if you coordinate properly with the court.
No. 1: It doesn’t eliminate other types of debts.
Just like Chapter 13 bankruptcy, not all debts can be eliminated by this type. These obligations are the following: student loans, child support, alimony, taxes, and criminal restitution debts.
No. 2: It affects your credit report temporarily.
Once it takes effect, you may wonder, how long does bankruptcy affect your credit? Well, this type of bankruptcy stays on your credit history temporarily for seven years. Within this period, you cannot acquire approval for any credit or loan applications, so this would withhold your plans for any financial goals you have.
No. 3: It can drain you financially.
Unknown to a lot of people, this type could drain your finances as this requires you to pay legal fees that are mandatory such as court administrative and attorney fees to name a few. Aside from this, you would be required to liquidate any of your luxury items to pay off your other debts that could not be eliminated.
Chapter 13 Bankruptcy
No. 1: It affords you a flexible repayment plan.
Through this type of bankruptcy, the court will devise a repayment plan for you after consulting you and your attorney. This method allows you to pay your debts using your disposable income over a period of 3-5 years. Your payment will be entrusted to a Bankruptcy Trustee who will collect the payment from you and will distribute it equally to your creditors.
No. 2: It does not give your creditors power over you.
This type protects you from your creditors to demand full payment of your debts since the court will decide the amount that you would be paying your creditors based on your remaining disposable income. This can be beneficial if you have larger loan amounts you can’t pay off.
No. 3: It allows you to pay your home arrearage.
One excellent feature of this type is that it allows you to catch up on your arrears of your home in case you’re very behind with your monthly repayments, and you can pay the arrears at 0% interest within a 60-month period.
No. 4: It frees you from paying interests and penalties attached to your debts.
Another useful feature of Chapter 13 bankruptcy is that the court only requires you to pay the principal amount of your debts. This means you’re not obliged to pay the interests and penalties. This is ideal if you’re struggling to pay back both the principal and the interest all in one. This will give you some leeway in getting your bills paid off faster while keeping them under control.
No. 5: It has “Auto Stay” that protects you from court proceedings.
Once this type takes effect, the so-called “automatic stop” will protect you from other lawsuits such as wage garnishment, bank account garnishment, and home or care foreclosure or sale. This helps you in the long run as it removes the risk of having to lose everything to fast and too soon.
No. 1: It affects your credit standing.
Chapter 13 bankruptcy affects your credit standing for ten years. This means if you have to apply for anything credit related it will affect how those who will be lending you the money see you as a potential customer.
No. 2: It doesn’t allow you to acquire debt while in bankruptcy.
Unfortunately, with this type of bankruptcy, you can't apply for a loan beyond $250, especially if you have emergency expenses. Only with the permission of the court, you can ask for such privileges. This can be a downfall for those who may need to make an emergency purchase such as a new car and require a larger loan to take it out.
Getting to know the pros and cons of filing either of these two types of bankruptcy would help you in your decision-making process especially when you’re in a situation that would compel you to go this direction.
Bankruptcy isn’t an easy decision because it can leave a heavy mark on your overall credit score and life. So, it’s important to really focus on whether you need to look at other means in order to clear your debt or whether this option is the best for your situation.
Whatever your decision might be, what’s essential is for you head towards a debt-free life to regain the life that you used to enjoy.
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So, do you think bankruptcy is an option for your needs?