Learn Bankruptcy Facts & How They Affect You
Bankruptcy used to be an event that inspired great dread and social stigma within society. Acquiring un - payable debts was considered to be the sign of a deficient moral character. Bankruptcy was the ultimate outcome, and the social consequences could be severe. Anyone with outstanding debts had a hushed air of notoriety surrounding their public reputation.
Today, such austere social rules have loosened, but the legal consequences remain the same. Creditors can garnish wages and seize assets to repay the amounts they loaned to debtors. To put a stop to these actions, the debtor has to file for bankruptcy. This is not as simple a process as it sounds. The legal proceedings of bankruptcy are designed to ensure the debtor is not trying to game the system and illegally escape his obligations. The debtor has to legally show he is unable to pay his credit card debt before the bankruptcy court will alleviate his burden.
The largest financial problem most consumers have these days is excessive credit card debt. The majority of it is left over from the days of speculative fever during the housing bubble. Ridding oneself of it and other debts requires hiring an attorney, since going to bankruptcy court on one's own for the first time can be dangerous. There are two types of bankruptcy that are appropriate for individual debtors: Chapter 7 and Chapter 13.
Chapter 7 is known as the liquidation chapter. Filing for Chapter 7 bankruptcy protection starts a process that begins with an automatic stay issued by the bankruptcy court judge. This stay prevents any and all collection actions for the duration of the proceedings. Foreclosure, wage garnishment and asset seizure all stop until the debts are officially discharged or the court rules the debtor must repay them.
Under Chapter 7, the debtor turns over all of his assets to a bankruptcy trustee. The trustee then categorizes them as "exempt" or "non-exempt." Exempt assets are returned to the debtor, while non-exempt assets are sold off, and the profits are used to repay creditors. Any debt remaining is discharged unless the law says otherwise, such as with student loan debt.
Unfortunately, Chapter 7 does not halt foreclosure proceedings permanently. After the debt has been discharged, the lien on the debtor's house still exists, which allows the lender to proceed with the foreclosure. Chapter 7 also leaves the debtor still liable for student loan debt.
Chapters 13 have the debtor draw up a repayment plan and submit it to the bankruptcy court. The plan is reviewed by the trustee and creditors. If the creditors approve, the debtor is required to make monthly payments to the trustee, who distributes the money to creditors. The court enforces the repayment plan for up to five years. The debtor is prohibited from acquiring new debt or selling assets without the court's approval.
If the debtor does not complete the plan for whatever reason, a creditor may petition the court to convert the Chapter 13 case into a Chapter 7 case. The bankruptcy still appears on the debtor's credit report. Creditors may not react uniformly the same to bankruptcy, but it will lower the debtor's credit score.
Chapter 7 is actually the more dangerous of the two cases because
It does not ultimately stop foreclosure or tax collection activities
The debtor is stripped of most of his assets
He starts over literally from scratch
Bankruptcy offers new life to individuals who cannot take the credit card debt consolidation route. By taking the chance to rebuild their balance sheets, they can put themselves on firmer financial footing. Bankruptcy is meant to relieve debtors who have run out of options including credit card debt consolidation.