A very basic definition of bankruptcy is that it is a federal court process than can help consumers who are in debt to alleviate and pay off their debts. What this definition doesn’t tell you, however, is that bankruptcy can be a great way for people to get back on their feet and regain their financial independence. Of course, the process doesn’t come without some consequences, but for those who are truly in need of a way out of debt, it can be a wonderful and much needed solution.
The two most common types of bankruptcy in the United States are Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. Chapter 7 Bankruptcy is also referred to as liquidation. This is because, with this process, the debtor’s possessions, minus a few exceptions, are sold off in an effort to repay the debts. The less popular option, Chapter 13 Bankruptcy, is known as reorganization. With this process, the debtor works with officials to create a bankruptcy plan. This plan sets forth a method of repaying the accumulated debts, over a pre specified period of time. The plan must be approved by the bankruptcy court in order to be considered valid, and it must also show that creditors would still receive just as much money as they would have if the debtor would have filed for Chapter 7 Bankruptcy instead. The most common reason that people file Chapter 13 Bankruptcy instead of Chapter 7 is because they were ineligible for a Chapter 7 Bankruptcy, usually because their income was too high.
Though filing for bankruptcy is sometimes a necessity, it does have an impact on credit score. Those who file for Chapter 7 Bankruptcy will have this on their credit report for a period of ten years, while those who opt for or are forced into Chapter 13 Bankruptcy will only have their credit impacted for seven years. Though it can be difficult to secure loans, credit cards, housing, and other things after bankruptcy, it is not impossible. Usually, debtors must start with smaller or lesser known credit or financing companies and work their way up.
Obviously then, bankruptcy is a very serious and complex process. Certain rules and regulations about bankruptcy vary from state to state, so it is important that you understand and are aware of these before you begin the filing process. The best way to go about a bankruptcy is to hire a well respected and knowledgeable bankruptcy attorney to help with every step of the process. This can make the entire thing much easier and faster and will make it more likely to be successful. Many people also benefit from attending credit counseling or debt management classes after the bankruptcy is complete. It is very important that debtors learn to change their spending habits in order to avoid getting into financial trouble again in the future.