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When to file bankruptcy?

When one is completely drowned in debts, and all the cash has drained out, other alternatives like debt consolidation may not be feasible. Bill collectors haunt debtors and make their life miserable. However, if situation is out of control, one may be compelled to choose bankruptcy. Another desperate situation to file bankruptcy is when one is facing foreclosure. Federal bankruptcy may save one’s home. However, bankruptcy scars credit scores for a long time. Hence, proper deliberation is obligatory before claiming bankruptcy. Before filing for bankruptcy, an individual will be asked to take a means test. The test is conducted to determine whether an individual is eligible for Chapter 7 Bankruptcy or Chapter 13 bankruptcy.

The pros and cons of Chapter 7 and Chapter 13 bankruptcy

In Chapter 7 bankruptcy, an individual is able to discharge most of the unsecured debts. That is, one can get rid of most debts without paying them back. However, this type of bankruptcy is also known as liquidation. The debtor has to turn in all of the non-exempt property to the bank trustee. Debtors are permitted to retain some of their belongings. The bankruptcy trustee will sell the assets and distribute the recovered money to the creditors. The proceedings generally take four months. And within a span of few months, the debtor gets a “fresh start”. Credit Card Debt Bankruptcy is generally covered under Filing Chapter 7 Bankruptcy.

Chapter 13 bankruptcy is known as “wage earner’s bankruptcy”. It can be filed by individuals who wish to repay all or part of their debts over a period of three to five years. However, it is an alternative only for people who have a fixed income, and it should be adequate to cover their monthly expenses with some surplus amount to repay their debts. The debt amount to be reimbursed, and the duration of repayment is determined based on the total debt amount owed, the worth of all the property possessed by the individual, and the present ability to repay the debts. An individual can defend all possessions by Filing Chapter 13 Bankruptcy, with the condition that the repayment plan is strictly followed.

There are restrictions on earnings while filing for bankruptcy under Chapter 7. Whereas, there are limitations on total debt owed while filing for bankruptcy under Chapter 13. And with the new bankruptcy laws, rules for filing bankruptcy have become more stringent. In any case, bankruptcy will relieve one of undue debt, and an individual will be able to lead a debt-free sooner.

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