If you face debts that seem insurmountable, filing for personal bankruptcy might be an option to consider. But before you rush off to file a petition for bankruptcy with the local courthouse, make sure you know exactly what that means.
There are two types of bankruptcy petitions you can file: Chapter 7 and Chapter 13. Each type has a different purpose with a different outcome. Which type of bankruptcy you should file is dependant on your personal financial situation.
A Chapter 7 bankruptcy petition is meant for people whose debts far exceed their assets and would have extreme difficulty ever settling their current debts. This type of bankruptcy would result in the liquidation of all assets, aside from those that merit exemption. All proceeds from liquidation would then be split among the creditors you owe. In return, you are discharged from all applicable debts. Once Chapter 7 bankruptcy is filed, your creditors must cease and desist from all lawsuits, wage garnishings, phone calls and letters related to your debts.
Bankruptcy law is not intended to leave you destitute, and should you file a Chapter 7 bankruptcy petition, you are entitled to retain certain limited assets. These include $18,450 worth of equity in your home, vehicles worth less than $1500, and most clothing, furnishings and household goods.
There are some debts which will not be discharged with the filing of a Chapter 7 bankruptcy petition. These include current or past child support and alimony payments, most student loans, recent tax bills or any debts where the owed creditors can prove your financial dishonesty in the past.
Your Chapter 7 bankruptcy petition may be denied if a judge deems you fit to pay, in which case you may re-file a Chapter 13 bankruptcy petition. A Chapter 13 does not discharge you of your debts, but rather reorganizes them through the enactment of a court ordered repayment schedule where you repay your creditors over a period of three to five years.
Chapter 13 bankruptcy is the preferred option for people who wish to retain control of their assets and/or have a reliable and prolonged source of income.
Before making the decision to declare bankruptcy, it is important to consider any co-debtors, such as those who have co-signed for loans with you. If they do not co-declare bankruptcy with you, your creditors will go after them to settle outstanding debts even if you yourself have been discharged of those debts.
Whichever bankruptcy petition you file, declaring bankruptcy will do damage to your credit rating. However, most people who declare bankruptcy already have extremely poor credit ratings, so it is unlikely that bankruptcy will make them much worse. Given that bankruptcy can give you a fresh financial start and allow you to rebuild your credit, it may even help your credit rating over the long term.
Before making the major decision to declare bankruptcy, it is also prudent to consult with a lawyer, credit counselor or financial advisor to ensure you’re doing what’s best for your financial future.
Robert Michael is a writer for www.aolbankruptcy.com
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