Bankruptcy 101

Like poverty, bankruptcy is often seen as a moral issue, instead of a financial one. The stereotype of the person who files bankruptcy is that of an irresponsible, lazy individual, who spends well beyond his means or intentionally racks up huge credit card debts, then shirks his financial responsibilities by filing bankruptcy.

The truth is that most people who file bankruptcy are good, honest, hard-working people who have fallen on hard times. For some it could be excess credit debt, or poor financial planning, but for a majority of people serious life upheaval and circumstances beyond their control are the major causes.

·  Medical expenses. A study released by Harvard University revealed that medical expenses were responsible for 62 percent of all bankruptcies, and that of those 78 percent had some form of health insurance. You could be fairly stable one day, get hit by a bus, and have your finances decimated the next.

·  Job loss and was the second highest cause and, even as unemployment rates are dropping, it is still a major factor for a lot of people.

·  Divorce and separations can cause serious financial upheaval, especially if one partner earns significantly less and is left responsible for major debts.

·  Acts of God, like a house fire or a natural disaster, can wipe out your finances in the blink of an eye.

As you can see, bankruptcy (and the poverty that can contribute to it) can happen to good, up-standing people, for a variety of complex reasons.

As an individual, you may be eligible for one of two types of bankruptcy: Chapter 13 and Chapter 7.

Chapter 13

Chapter 13 bankruptcy is designed to help you pay back the bulk of your debt, while possibly eliminating late fees, interest, and even some of the smaller debts.

For example, say you have a car loan with high interest and late payments, several medical bills, a mortgage, and some credit cards with late fees. Under Chapter 13 the courts could negotiate to:

·  Remove all the late fees.

·  Write off some of the credit cards.

·  Adjust the amount due on your car to current market value.

·  Set up a payment plan for the remaining debt.

·  Set up an agreement with the bank regarding your mortgage.

As a result, you could eliminate the credit card debt, pay off the medical debt, and get to keep your home and car.

According to the professionals at Doan Law, Chapter 13 is ideal for individuals who have the ability to pay off some of their debt and have assets they would like to keep.

Chapter 7

Chapter 7 is what people usually think about when considering bankruptcy. It is designed to eliminate almost all of your debt, so you can start over with a clean slate. Taxes and Student Loans are some of the only debts that you cannot eliminate with Chapter 7. The other difference between Chapter 7 and Chapter 13 is that you may have to give up some of your assets.

For example, say you have the same medical bills, credit cards, car loan, and mortgage as the example above. Under a Chapter 7, you would surrender any assets that have a lien on them back to the creditor, such as your home, car, and credit cards, in exchange for wiping out the debt.

Chapter 7 is idea for individuals who do not have the ability to pay off any of their debt, and are willing to surrender some assets.

Things to Consider

A Chapter 7 bankruptcy can last seven years. During that time you are advised not to open any new lines of credit, but many can do so after the first year. However, if you take out new credit and encounter financial difficulties, you will not be able to file Chapter 7 again, until the seen year period is over. Even then it could be difficult to file Chapter 7 again.

A Chapter 13 bankruptcy can last up to ten years. During that time you should not be able to open any new lines of credit. Once the Chapter 13 is resolved, however, you can take out new credit to rebuild your credit history.

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