Bankruptcy is a legal proceeding designed to help individuals or businesses who can’t repay their debts. The ultimate goal of this process is to give the filer a fresh financial start while providing a fair outcome to their creditors. Although it can give financial relief to many, bankruptcy comes with long-term financial and legal consequences.
There are a few different types of bankruptcy that can be filed in the United States, but individual filers will choose between Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 involves liquidation and discharging all qualifying debts so that you no longer have to make payments. In order to qualify, you must pass the Chapter 7 Means Test, which the bankruptcy court uses to determine your ability to repay your debts. If you earn less than the average for your state and cannot afford to pay a minimum monthly payment, you may qualify for Chapter 7 bankruptcy.
Commencement of a bankruptcy creates an “estate,” which becomes the temporary legal owner of all your property. The trustee, who is appointed by the bankruptcy court, administers the estate, and gathers and sells your nonexempt assets, if any. The trustee then uses the sale proceeds to pay creditors. The court will ultimately decide which assets are exempt.
At the end of the bankruptcy process, the court will discharge your unsecured debts like credit cards, medical bills, personal loans, car accidents judgments, some tax debts, and garnishments. Non-dischargeable debts generally include child support, most student loans, and most tax debts.
Chapter 13 Bankruptcy
Chapter 13 aims to reorganize your debts. The court will require you to make an affordable monthly payment as part of a strict three to five-year payment plan. If you make all your payments, your unsecured debts may be discharged.
Is Filing for Bankruptcy Right for Me?
Although bankruptcy can provide relief to many, it may not be the best debt relief option for everyone. It is highly recommended that you speak with an attorney before proceeding with a bankruptcy filing.
Pros of Bankruptcy
Debt Discharge: The biggest benefit of filing for bankruptcy is the potential to have your debts discharged. With discharged debts, you are no longer obligated to pay back your creditors.
Protection of Important Assets: Most bankruptcy filings protect your home and main vehicle, making it possible to continue commuting to work and living in your home.
No More Collection Calls: Debt collectors are not allowed to continue collection activities while the bankruptcy case is pending in court.
Cons of Bankruptcy
Negative Impact on Credit: Bankruptcy filings can stay on your credit report for 7 to 10 years. This may cause problems if you intend to apply for credit in the future.
Not All Debts are Covered: Most student loans, alimony, child support, and fines or fees owed to the government are not eligible to be discharged.
Long-Term Consequences: Bankruptcy usually means giving up on credit cards or loans until you can rebuild your credit.
Bankruptcy is not your only option to getting out of overwhelming debt. There are several bankruptcy alternatives for individuals to consider, including:
One of the most common ways to avoid bankruptcy is through debt consolidation, including options such as consolidation loans or debt settlement. Many individuals work with a trusted debt relief company to guide them through the debt consolidation process.
Bankruptcy Alternative FAQ
How can I avoid bankruptcy?
Bankruptcy is a serious decision that promises freedom from your debt, but comes at a high cost. Before choosing this path, avoid bankruptcy by taking on as little debt as possible and making all your debt payments on time. If you need debt relief explore bankruptcy alternatives like debt settlement, debt consolidation and debt management.
What are the best bankruptcy alternatives?
Working with a trusted company like Accredited Debt Relief that can offer you a bankruptcy alternative that is right for you. Debt management, debt settlement, and debt consolidation loans are all bankruptcy alternatives that can help you get out of debt faster and for less money.
What are the negative effects of bankruptcy?
Filing for bankruptcy will damage your creditworthiness and may prevent you from taking on new credit in the future. Bankruptcy filings will stay on your credit report for 7 to 10 years, so the decision should not be made lightly. Make sure you consider alternatives like debt settlement before committing to bankruptcy.
Why Choose Accredited Debt Relief?
Accredited Debt Relief is a financial services organization dedicated to providing debt settlement solutions and savings to individuals, families, and businesses struggling with debt across the U.S. With an A+ rating from the BBB and a history of successfully helping clients resolve their debts without bankruptcy, we can help you find the debt relief program that works best for you.
- United States Courts - Chapter 7 Bankruptcy Basics: https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics
- United States Courts - Chapter 7 Means Test: https://www.uscourts.gov/forms/means-test-forms/chapter-7-means-test-calculation
- United States Courts - Chapter 13 Bankruptcy Basics: https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics