Bankruptcy
Bankruptcy is recommended if owe excessively and cannot repay creditors. However, the bankruptcy route has many PROS and CONS:
Chapter 7 bankruptcy is the most popular bankruptcy option, which allows you to discharge most debts. However, you must surrender non-exempt property to a bankruptcy trustee to be liquidated and have the proceeds of the sale distributed to your unsecured creditors. Normally, you can exclude xempt property, such as your home, used car or household goods. You can only file Chapter 7 once every eight years. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), to qualify for Chapter 7, you must pass a means test, which you can fail if you’re unable to show the bankruptcy court your inability to pay back at least a portion of the debt.
Chapter 13 bankruptcy, also called the "wage earners plan", allows you to retain ownership and possession assets. However, you must dedicate a portion of your future income to repay creditors within 3 to 5 years. The value of your property and amount of income and expenses will determine the amount of the debt repayment and the repayment plan period. If you miss any court-ordered payment, the bankruptcy trustee can motion to have your case dismissed by the court.
If you decide to file bankruptcy, you must undertake consumer credit counseling with an approved consumer credit counseling agency prior to filing the bankruptcy petition. Additionally, you must take personal financial management education from an approved consumer credit counseling agency before the bankruptcy court can grant a discharge of the debt under a Chapter 7 or Chapter 13 bankruptcy.
| BANKRUPTCY PROS |
BANKRUPTCY CONS |
| • Stops collection activity – foreclosures; vehicle repossession; wage garnishment. |
• Cannot discharge student loans and back taxes (within 3 years), alimony and/or child support. |
| • Most states allow home, car, and other personal property exemptions. |
• Must surrender credit cards, home (in some states if equity exceeds $100,000); property not exempt from sale by bankruptcy trustee. |
| • Filer may be able to obtain new lines of credit within two or more years of filing bankruptcy. |
• May take many years to get unsecured credit card privileges. |
| • Chapter 7 discharges most debts. |
• If you fail the means test, you may have to file Chapter 13, requiring debt repayment in 3-5 years. |
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• Stays on credit report for 10 years hurting chances to get credit, life insurance, employment, purchase a home or car, or lease an apartment. |
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• Bankruptcy filer's name appears in court records for 20 years and may appear in the newspaper. |
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