How Filing Bankruptcy Reduces Money Worries

Is Chapter 7 Bankruptcy or Chapter 13 Bankruptcy the Better Option?

Apr 29, 2009

There is little doubt that filing bankruptcy helps many US families to alleviate money worries. Is it better to apply for chapter 7 bankruptcy or chapter 13 bankruptcy?

Filing bankruptcy is a debt solution of last resort, but remains an excellent way for American families to escape their money worries. Changing life circumstances, such as involuntary redundancy or ill health, can change a comfortable set of circumstances on its head. This is evidenced by the growth in personal insolvencies over the course of the last 12 months.

The Number of People Filing Bankruptcy in America

According to the American Bankruptcy Institute, there were 1,074,225 people that decided that filing bankruptcy was the best way to alleviate their money worries. California had the highest figures with 86,678 opting for chapter 7 bankruptcy and a further 29,925 choosing chapter 13 bankruptcy. No matter how isolating insolvency makes a person feel, there are thousands of others in exactly the same boat.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy involves passing over all non-exempt property to a trustee. The assets are then sold and the cash is distributed to creditors on a pro rata basis. The majority of debtors filing bankruptcy have no assets; this means that a debtor can get a fresh start relatively quickly.

It is possible to proceed with chapter 7 bankruptcy if the debtor's last 6 months pay checks are below the median income for that state. If an income is slightly higher than the state average, a lawyer may be able to identify certain expenses that could be used to offset earnings during calculations.

* Research performed by Best Case Solutions showed that 85 per cent of those filing for chapter 7 bankruptcy have an income below the median level.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy involves paying off debts over a period of 3 to 5 years. This type of insolvency is the preferred option for those who have non-exempt assets that they don't wish to lose. It is only suitable for debtors that have a regular income that they can afford to contribute towards the debt solution.

Filing bankruptcy can be useful for those who have mortgage arrears or have fallen behind with repayments on a car loan. Chapter 13 bankruptcy protection constitutes an excellent way of preventing foreclosure as it allows a homeowner to clear debts over a 3 to 5 year period before continuing to make normal monthly repayments.

Current bankruptcy law allows a debtor to select the type of insolvency that is best for their personal situation. The rules can be complex so it is advisable to secure the services of a lawyer to help with any general advice and associated paperwork. Both chapter 7 and chapter 13 bankruptcy will affect personal credit scores for a period of 7 to 10 years.

Consumers that are struggling with money worries may be interested in reading more about how different forms of bankruptcy can eliminate and reorganize personal debts. Other may wish to discover whether the subprime mortgage crisis really is at an end.

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.

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