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What Are The Types Of Bankruptcy?

Bankruptcy is always the option of last resort for consumers and businesses because while there are financial implications it also takes an emotional and personal toll for those involved. When bills are being left unpaid and there are no longer financial resources available to pay off debt there are a few bankruptcy options available. Which bankruptcy type is chosen will depend on your individual circumstance and whether or not you qualify in the eyes of the legal system.

What Is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy is often referred to as a fresh start for individuals as it wipes the slate clean by eliminating all outstanding debts. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made it more difficult to declare Chapter 7 bankruptcy. It was believed many consumers were using Chapter 7 to eliminate debt even though they could find a means to pay back unsecured credit cards and other forms of credit. In order to qualify a consumer must go through a pre-filing briefing using an approved agency to verify their financial status and that bankruptcy is the appropriate solution. Once they have a certificate, they can speak with a bankruptcy attorney who will evaluate additional information using a process called a main stance and decide between Chapter 7 or Chapter 13 for the consumer.

What Is Chapter 13 Bankruptcy?

Most consumers, unless under the most destitute circumstances, will be guided towards Chapter 13 personal bankruptcy. This type of bankruptcy is referred to as a structured reorganization as it allows the consumer to pay back financial obligations under the guidance of the trustee to make sure the terms are fulfilled. This is a direct result of BAPCPA and increased consumer default on credit card obligations. Often times consumers would run up tens of thousands of dollars on credit cards and then declare Chapter 7 personal bankruptcy to eliminate the debt. This would severely penalize credit card issuers leaving them with no recourse or ability to collect payment as they are unsecured in nature. Under Chapter 13 bankruptcy, consumers are responsible for the full amount of the debt to be repaid and will make monthly payments determined by the court until their obligation is paid in full.

What Is The Negative Credit Impact?

A personal bankruptcy is one of the absolute worst items which can appear on an individual's credit report. It is an enormous black mark which signals to all future creditors that the individual in question was unable to pay financial obligations and sought legal assistance in mitigating the repercussions. While not always the fault of the consumer due to situations like job loss and medical expenses, these situations rarely matter to lenders. Always evaluate all possible solutions such as dealing directly with creditors, getting a part-time job, settling or having charge-offs and borrowing money prior to seeking bankruptcy. Bankruptcies appear on credit reports for up to 10 years and can make it next to impossible to rent an apartment, find a job or receive any type of credit in the future. A bankruptcy is not a matter to be taken lightly and should only be sought after all other options have been exhausted.