Debt can be difficult to cope with and there are an overwhelming amount of individuals who bury their heads in the sand and hope that the debt will just go away. Unfortunately it won’t and it’ll just get bigger. The good news is that there is help at hand and even if it takes one down the route of bankruptcy, the term doesn’t have the same stigma attached as it did many years ago. It can be the opportunity for a new start.

If you’ve got this far then credit counselling and creditor agreements probably haven’t worked and whilst I can point out some of the differences between chapter 7 and chapter 13, my guess would be that you have reached a level of sincerity where professional advice needs to be top of the agenda.

But first, let’s take a look at the kind of situations that warrant the different types of bankruptcy;

Chapter 7 is probably best suited for those individuals who find themselves overwhelmed with credit card debt, medical expenses and unsecured loans.  A typical chapter 7 debtor should receive a discharge in about 6 months but there are exceptions which I don’t intend to cover in this post that should be considered prior to filing for bankruptcy.

There are statutory fees associated with both types of bankruptcy and they are subject to change. As of June 2009 the charge for filing a chapter 7 was $299. This fee does not cover any legal charges that may be levied by legal/professional advisors during the process.

Chapter 13 is a bit more long term and requires an individual to work with the courts to reduce the overall liability. Generally those who opt for chapter 13 will be able to pay their ongoing expenses and will own assets such as houses, cars etc.  When going through chapter 13 bankruptcy the court will appoint a trustee to work with the debtor organising a single monthly fee that the trustee will manage and distribute to the creditors.

Creditors will no longer have direct contact with the debtor and any disputes or further correspondence must be made through the trustee.

The statutory fee for making a chapter 13 application as of June 2009 was $274. As with a chapter 7 application this is a statutory fee which does not include any legal or professional fees associated with the application.

Chapter 13 may be able to prevent foreclosures and/or repossessions, will prevent further harassment by creditors and will generally last for a period of between 3 and up to 5 years. 

Whichever route you embark upon you are required to take advice first.

Facts about Bankruptcy
Bankruptcy is not as bad as it’s painted out to be and whilst it is not difficult for someone to find bad news and horror stories across the internet on the subject, I would venture a guess that a good proportion of these are implied by credit card companies or the like, that quite frankly don’t want anybody to go bankrupt as it can be an end to their chances of getting any money back off a debtor.

A couple of positives about bankruptcy;

1. It can prevent foreclosures and repossessions
2. It can clear or reduce debt
3. It will prevent creditor harassment

 

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Bankruptcy is structured to allow debtors a breathing space in order to get back on track. How they manage that time could determine the length of the bankruptcy period.

Credit ratings
It is true that bankruptcy will have a negative effect on somebody’s credit rating. Generally in order to get as far as bankruptcy it is highly likely that the debtor’s credit rating is already tarnished and therefore one should consider whether or not that is in fact even relevant when considering applying for bankruptcy.

Once a debtor has been discharged they should be able to find a credit/store card company to allow them the opportunity to take on another card. Whilst I would remind people to be mindful of why they have needed to enter bankruptcy in the first place, getting a credit card (albeit probably paying higher interest rates than most) and paying off the balance each month will go a long way to demonstrating an ability to control one’s finances, enabling the credit rating to recover over time.

Bankruptcy is not the end of life, indeed for most it becomes the new beginning. It is not an easy way to avoid paying debt and individuals should be wary of entering an application as an easy option as the courts are likely to want to establish what efforts have been made to engage with creditors prior to approving a bankruptcy application.

Tags: credit report, debt consolidation, money