Bankruptcy can seem like an intimidating process, especially for those unfamiliar with how it works. However, for individuals facing significant financial challenges, bankruptcy can offer a fresh start and a structured way to address overwhelming debt.
This article provides a beginner’s introduction to bankruptcy, outlining the basics of the process, its different types, and how it can help individuals regain control of their finances.
What Is Bankruptcy?
At its core, bankruptcy is a legal process designed to help individuals or businesses unable to repay their debts.
It allows debtors to either eliminate or reorganize their debt under the protection of the court. Bankruptcy can provide relief by stopping collections, halting foreclosure proceedings, and giving individuals time to restructure their finances.
The Two Types of Bankruptcy
According to Experian, there are two primary types of bankruptcy for individuals: Chapter 7 and Chapter 13. Each type serves different financial situations and provides varying levels of debt relief.
Chapter 7 Bankruptcy, often called “liquidation bankruptcy,” involves the sale of non-exempt assets to repay creditors. After the sale, remaining eligible debts are discharged, meaning the individual is no longer legally obligated to pay them. This type of bankruptcy is ideal for those who have limited assets and significant unsecured debt, such as credit card balances or medical bills.
Chapter 13 Bankruptcy, known as a “wage earner’s plan,” allows individuals to keep their property while reorganizing their debt into a manageable repayment plan. Instead of liquidating assets, debtors make monthly payments for 36 to 60 months. This option is typically used by individuals with a regular income who want to catch up on missed payments for secured debts, like a mortgage or car loan.
Stopping Foreclosure with Bankruptcy
One of the significant benefits of filing for bankruptcy is the automatic stay, which immediately halts collection efforts, including foreclosure. When you file for bankruptcy, the foreclosure process on your home is temporarily stopped.
According to bankruptcy laws, Chapter 13 bankruptcy allows homeowners to pay back the amount they owe on their mortgage through a structured payment plan over 36 to 60 months. This can give you the time and flexibility to save your home while managing other debts.
Chapter 7 Bankruptcy: Quick Relief from Unsecured Debt
Chapter 7 bankruptcy offers a relatively fast way to discharge unsecured debts, such as credit card balances, medical bills, and personal loans. According to Epiq, in the first quarter of 2024 alone, there were 66,861 Chapter 7 bankruptcy filings, reflecting the widespread use of this option for individuals facing severe financial hardship.
Chapter 7 is often suitable for those who do not have the means to pay off their debts and are looking for a fresh start. However, it’s important to note that not all debts can be discharged through Chapter 7, such as student loans or child support.
Understanding the Bankruptcy Process
The bankruptcy process typically begins with filing a petition in federal bankruptcy court.
This petition includes detailed information about your financial situation, such as income, debts, assets, and expenses. Once the petition is filed, an automatic stay goes into effect, halting any collection actions by creditors, including wage garnishments, lawsuits, and repossessions.
In a Chapter 7 case, a court-appointed trustee will review your assets and determine which can be sold to repay creditors. In contrast, under Chapter 13, the debtor proposes a repayment plan based on their income, and the court approves or adjusts the plan accordingly.
Throughout the process, you will be required to attend credit counseling and financial management courses designed to help you manage your finances post-bankruptcy.
Rebuilding After Bankruptcy
Filing for bankruptcy will affect your credit, but it’s not the end of your financial journey. While bankruptcy remains on your credit report for several years (10 years for Chapter 7 and 7 years for Chapter 13), it is possible to rebuild your credit and financial health.
Many individuals find that they can start rebuilding their credit by using secured credit cards, making timely payments, and maintaining a budget. Over time, responsible financial management can improve your credit score and help you move forward with your financial goals.
Bankruptcy is a legal tool that provides a fresh start for individuals overwhelmed by debt. Whether through Chapter 7’s debt discharge or Chapter 13’s structured repayment plan, bankruptcy can help individuals regain financial stability.
By understanding the process and its benefits, you can decide if filing for bankruptcy is the right step for your financial future.