Being in debt can be overwhelming. There are several reasons why an individual can incur debt. It could because of credit card misuse, overdue mortgage, unpaid medical debts or a business that has gone badly. To most people the easiest way to get out of these debts is to declare bankruptcy. What does bankruptcy really mean to a person who is in debt? Is it a lifesaver or a nightmare that will haunt you through the years? Before thinking that bankruptcy is a cut and dried, easy solution to your financial problems, let’s take the time to know the facts first before deciding to file for bankruptcy.
What is Bankruptcy?
Unless you’ve been living under a rock for the past century, a lot of us are familiar with the term bankruptcy. Every person has an idea what is bankruptcy but what is the exact meaning of bankruptcy? According to Wikipedia, it is a legal status of an insolvent person or organization. When you say insolvent, it would mean that there is no more ability to repay the debts owed to creditors.
In law books, bankruptcy is described as a legal process under the federal law. It allows an individual to legally decrease, restructure or totally wipe out their debts, as long as they will meet the requirements prescribed by the federal court.
What are the different kinds of Bankruptcy?
In the Bankruptcy Code of Law, chapters are used to identify the different bankruptcy types that you can file in the federal court. The three known chapters are 7, 11, and 13. Not all the mentioned chapters can be used by the individuals who will file for bankruptcy. Each chapter has a distinctive character.
Chapter 7 is also known as the straight bankruptcy. The instruction would be for the individual to go to court and request that your unsecured debts be discharged. Filing of Chapter 7 takes approximately 180 days from start to finish. Individuals who belong to the lower income level or have a fixed income will qualify for Chapter 7. Although it sounds easy enough, the downside is that it would be written in your credit report and will stay there for ten years. What will this mean? It can be very difficult to secure new loans because the creditors would think of you as a high risk and most likely will think twice to grant you credit.
Chapter 13 is another bankruptcy that can be filed by an individual. This is different from Chapter 7 due to the fact that your debts will not be wiped out. Instead, your loans or debts will totally be restructured with the help of the federal court. The length of time of repayment is a maximum of 5 years. Chapter 13 is the best option if you find your homes being foreclosed, cars being repossessed or student loans still remain unpaid.
Chapter 11 is used more by organizations or corporations. It is almost similar to Chapter 13 because it also allows reorganization with the financial obligations of a corporation. The process of filing for Chapter 11 is complex that is why this is used more by business or corporations.
Alison writes about medical bankruptcy on her blog, MedicalBankruptcyTips.com