In 2021, the U.S. Courts reported the closing of 511,666 consumer bankruptcy cases. Over half a million people sought the protection of bankruptcy, and if you are considering taking this step, it is important for you to know as much about it as possible.
Knowing your options and how the process works can make it easier for you to make the right decision about filing.
Types of bankruptcy
The two types of bankruptcy that are most common are Chapter 7 and Chapter 13. Chapter 7 involves the liquidation of assets to pay off debts. Some assets may be exempt, allowing the filer to retain essential property, such as a primary residence or personal belongings.
Unlike Chapter 7, Chapter 13 bankruptcy is a reorganization process where the debtor establishes a repayment plan, which typically spans three to five years. It allows individuals with regular income to retain their assets while gradually paying off their debts.
Not everyone qualifies for Chapter 7 bankruptcy, as eligibility depends on income. Chapter 13 is generally available to those with a regular source of income who will be able to follow a repayment plan.
Before filing for bankruptcy, individuals must undergo credit counseling from an approved agency. This step aims to help debtors explore alternative solutions and better understand the consequences of bankruptcy.
The general process
The bankruptcy process involves several key steps beginning with filing a bankruptcy petition with the appropriate federal court. Upon filing, an automatic stay goes into effect, halting most collection actions by creditors, including lawsuits, wage garnishments and foreclosure proceedings.
A creditors’ meeting comes next. The debtor answers questions about their financial situation. In Chapter 13, the debtor submits a repayment plan to the court for paying off debts over the specified period.
The court will discharge all outstanding dischargeable debts upon successful completion of the bankruptcy process. This means the debtor is no longer legally obligated to repay them.
Impact on credit
Bankruptcy has a significant impact on credit scores. A bankruptcy record typically remains on a credit report for several years, making it challenging to obtain credit or loans. However, it does provide a clean slate for rebuilding one’s financial life.
Bankruptcy is a legal process that can provide individuals with a fresh start when debt is overwhelming them. While it may sound daunting, understanding the basics of bankruptcy can help demystify this often misunderstood concept.