Overwhelming debt can lead to sleep deprivation, anxiety, and depression. If left unchecked debt can easily become a "prison." Although debt can feel like an impenetrable fortress, there are many ways to escape. After exhausting the options of budgeting, there are two major bankruptcy options for consumers. Chapter 7 bankruptcy dissolves a consumer’s debts and Chapter 13 bankruptcy restructures the debt.
Chapter 7 Bankruptcy:
Chapter 7 bankruptcy is the most common form of bankruptcy in the United States. This option is used to dissolve debt by selling a consumer’s non-exempt assets to pay his or her creditors. Most debts will be eliminated, however some debts are exempt from this discharge, like some tax debt or student loans in most cases.
The consumer’s assets will be categorized as either non-exempt or exempt. The non-exempt assets will be sold or an offer is made by the debtor to keep the un-exempt property. The money generated will be used to pay the consumer’s remaining debt.
In many cases the debtor will be allowed to keep their homes and cars. These debts must be paid on their original purchase terms. Chapter 7 bankruptcy will remain on the consumer’s credit report for ten years. However, after filing, debtor will be able to re-establish credit by using credit card and paying on loans for car and house. After one to two years the credit score is often better than it was before filing. The income-debt ratio is much better after the debt has been discharged (wiped out). The income is most often the same, but the debt is gone.
In order to file a chapter 7 bankruptcy a consumer must pass the “means test” created by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Chapter 13 Bankruptcy:
Chapter 13 bankruptcy is the restructuring of a consumer’s debt. This option protects the consumer’s assets from seizure while the debt is being paid based on income. In most cases unsecured debt like credit cards and medical bills can be wiped out like in a chapter 7. The monthly payments on secured debt, like car payment, may be reduced and paid over the course of three to five years.
The consumer must submit a restructuring plan to the court. After the plan is filed with the court, the consumer will submit monthly payments to a court assigned trustee. This trustee will disburse the funds to the creditors on behalf of the consumer.
This process virtually eliminates creditor phone calls, harassing emails, and certified letters. Chapter 13 restructuring allows the consumer to pay his or her debts under the protection of the court.
