Bankruptcy Information

There are two primary types of bankruptcies that most consumers file; the chapter 7 bankruptcy, and the chapter 13 bankruptcy.

I will give a brief overview of how each bankruptcy works and the effects that each has on the consumer that files bankruptcy. The Chapter 7 bankruptcy is often referred to as a discharge of debts. Essentially what the consumer is saying when they file chapter 7 is that they are unable to pay their debts and are asking that those debts be discharged. Normally the unsecured debts will ultimately be discharged (credit cards, unsecured loans, etc.). The secured loans (automobile, secured loans, and mortgage loans) may or may not be altered. In chapter 7 bankruptcy attorney's may try to have the value of the secured property reduced, therefore reducing the remaining debt payment. Keep in mind that the creditor does not have to accept any type of reduced valuing of the collateral and can simply opt to take back the collateral. In other words, with a secured loan you essentially have 2 choices pay for the debt based on the value of the collateral or return the collateral to the creditor.

The chapter 13 bankruptcy is often considered a reorganization plan. The debtor(s) and their attorney compile a proposed repayment plan that normally spans 36 - 60 months. A trustee is assigned to bankruptcy to administer the plan. Once the plan is approved, then the debtor(s) pay the trustee a set amount each month and the trustee in turn pays the creditors depending on the order of importance (type of debt). In most cases the repayment of the original debts are significantly reduced (except for certain secured debts and priority debts) from the original balance owed hence the reason for filing bankruptcy. This type of bankruptcy allows the debtor to keep the secured items, normally maintain regular monthly payments and make up the arrearages (past due amounts) over the life of the plan.

That is a very broad overview of the two most widely used bankruptcies used by consumers. I could write a complete book just on this subject alone. I really want to speak to the ramifications of filing bankruptcy. No matter what you hear or read about, bankruptcy filing will effect you and your ability to obtain future credit.

You may be able to get new credit very soon after filing bankruptcy, however, you will pay for it by paying higher interest rates.

My recommendation to anyone considering filing bankruptcy is to explore all other options first. Bankruptcy should be your last resort. Read my articles on this web site on budgeting and credit counseling. There are several other options that you need to explore before resorting to filing bankruptcy. That being said, I also am aware that there are some circumstances where bankruptcy may be your only option - that is why the bankruptcy laws were put into place!