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There are many different methods that you can use to help eliminate your debt and avoid bankruptcy. Options such as credit counseling programs, debt consolidation and even debt settlement are all methods that you can use to get out of debt. What do you do, however, if you cannot use any of these programs to get out of debt? Click on one of the topics below to learn more about your options.
Bankruptcy is the process by which you either renegotiate, in a court setting, with your lenders to pay off your debt in a manner that is amenable to your current financial situation, or your debt is written off completely. Bankruptcy is a federal process and cannot be circumvented by your creditors/lenders.
Bankruptcy should ONLY be filed for as a last result. This means that you have attempted to negotiate for credit card debt settlement, tried credit card debt consolidation and/or tried a debt management program. Bankruptcy will have serious, long term consequences on your financial profile and your life. If you can do ANYTHING to avoid bankruptcy then you should do it. It is possible that bankruptcy will appear on your credit report for 10 years which will seriously affect your ability to get more credit, a mortgage, finance a car, rent an apartment, or even get a job.
Once you’ve exhausted all other options then you might file for Bankruptcy in order to eliminate your debts or potentially save your home, car or other exempt assets. When you file for Bankruptcy, you cannot be sued for the debt that you owe.
Chapter 7, Chapter 13 and Chapter 11 are the three different options when it comes to filing for bankruptcy. Chapter 11 is specifically for businesses while Chapter 7 and 13 are for individuals.
Chapter 11 is a way for businesses to negotiate with their lenders so that they can repay their debts. Once a business is approved for Chapter 11, their lenders must abide by the repayment plan agreed upon post contract. This means that all prior contracts are null and void. But the company will have extreme problems getting approved for more credit later. Also any assets the company has will need to be sold to pay their debts.
Chapter 7 allows you to eliminate your entire debt once your assets have been sold and that money has been disseminated to your lenders. There are a few certain things that you will not have to sell, usually your home and/or your car as are protected assets, although other things also qualify, such as clothes, appliances, furniture and so on.
In order to qualify for Chapter 7, you do have to prove that you have no other way to repay your debts. In addition, you need to make less than the average median income for your state. You may not file for Chapter 7 if you’ve filed and been approved for Chapter 13 Bankruptcy or completed a Chapter 7 Bankruptcy in the past 6 years.
Chapter 13 is much more common and requires you to negotiate with your lenders so that you can repay your debt. Your repayment plan is mandatory and will be based upon your ability to repay based on your income. You will be assigned between 3 and 5 years to repay your debt. It’s possible that, based on your income and your assets, that the court will order that you pay off the original debt minus fees and interest rates.
Anyone who earns the median average income for their state and has no more than $250K in unsecured debt and $750K in secured debt will only qualify for chapter 13 Bankruptcy.
It is important to know that your Bankruptcy will appear on your credit report for 10 years. Also if you don’t stick to your repayment plan or can’t make a payment, then your creditors can take further action against you. This can even include asking the courts to banish the bankruptcy case, meaning you are no longer allowed to pay the negotiated rate anymore and you need to pay the full debt again.
Although Bankruptcy is filed on a state level, the forms that you need to fill out are federal forms and are the same for every state. While the initial forms aren’t complex, many people find the entire process overwhelming and time consuming. Some people find that the stress of trying to file for Bankruptcy is just as bad as being in a financial bind in the first place.
Due to the potential to have to sell your assets and the stress of being supervised for the length of the repayment plan, as well as the effect it has on your credit score and credit worthiness, its much better to consider an alternative first and avoid bankruptcy. To see what your options are, talk to one of our counselors by filling out our form here.
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