In today's economy, a growing number of people are finding it hard to make ends meet. With so many out of work and not able to pay their debt obligations, often it seems that the only answer is calling up a bankruptcy attorney and getting the process started. While bankruptcy can be a good solution for some people/families, it is not always the best option.
In order to help better understand the process and if it makes sense in your particular case, here are some common questions people often ask about bankruptcy:
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What is Chapter 7 Bankruptcy?
Chapter 7 is a type of personal bankruptcy whereby the debtor is permitted by the court to discharge certain debts, meaning the debtor is absolved of any liability to repay those debts. Debts normally included in a chapter 7 bankruptcy are unsecured loans such as credit cards and medical bills. Examples of common unsecured debts that CANNOT be discharged through a Chapter 7 include government-backed student loans, child support/alimony, and back taxes.
How Does a Chapter 7 Filing Work?
When a debt is discharged under a chapter 7 bankruptcy, the court orders the creditor to halt all collection activity on the debt owed. This means that the creditor must stop all phone calls, mailings, or any other form of personal contact with the debtor.
When Does Filing Chapter 7 Bankruptcy Make Sense?
When a person or family has a significant number of unsecured loans like credit cards and/or medical expenses and lacks the income to keep up even the minimum payments on them, then Chapter 7 bankruptcy may be the best option.
A typical scenario where a Chapter 7 might make sense is if the primary earner in the household becomes unemployed and/or disabled with very little prospect of finding decent paying work for the foreseeable future, and the family has a high amount of unsecured debt with little hope of paying it back. However, since each individual case is unique, it is always recommended to schedule a consultation with a bankruptcy lawyer to find out what's best in your case.
What is a Chapter 13 Bankruptcy?
A Chapter 13 is the other type of personal bankruptcy. In contrast to a Chapter 7, Chapter 13 does not completely discharge your unsecured debts. Instead, it works more like a debt consolidation in that it allows you to submit a plan to the court on how you will pay off your debts over a set period of months/years. If the court approves the plan, they will order the creditors to halt personal contact with the debtor. The debtor will then make a set monthly payment, which will be then divided up among the creditors in a fashion that is agreed upon by all parties.
When Does it Make Sense to File a Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy may be a good solution if you are behind and unable to make all the monthly payments on your various debts, but still have a steady monthly income. The effect of a Chapter 13 is to lower your interest and/or monthly payment obligation to a level that is deemed affordable, so you can eventually pay back your debts, just over a longer period of time than is called for under the current payment schedule.
If I file bankruptcy, will I be able to keep my house?
In most cases the answer is yes. As long as the equity in the home is exempted (which is usually just a matter of the bankruptcy lawyer petitioning the court for the exemption and the court approving it) you should be allowed to keep your home. In cases of a Chapter 13 filing, there should be no problem keeping your home as there are no actual debts being discharged during Chapter 13, and you will usually be making the same monthly mortgage payments as you were previous to the filing.
How does bankruptcy affect my credit?
Bankruptcy will stay on your credit report for 10 years. However, if you are in a position where it makes sense for you to file bankruptcy, your credit is likely already severely damaged. By filing bankruptcy, you are able to discharge most, if not all of your unpaid bills, meaning these debts will eventually disappear from your report altogether, leaving just the bankruptcy and any new credit obtained thereafter. If you are able to avoid getting behind on bills after the old unpaid debts are discharged through bankruptcy, it is possible that your credit will become stronger after the proceeding is over.
Can I file bankruptcy without affecting my spouse's credit?
It depends. If you have debts with both spouses' names on it and want them discharged through bankruptcy, then either both spouses need to file, or the spouse not filing bankruptcy will usually be held liable for the debt. If all the debts being discharged are in the name of the spouse filing the bankruptcy, then it should not affect the other spouse's credit.
There is one thing to keep in mind when it comes to joint debts and bankruptcy; if one spouse files and both spouses later apply for joint credit, the credit approval decision will normally be based upon the spouse with the lower credit score.
What is the cost of a typical bankruptcy attorney?
This depends on the type of filing and the region of the country you are in. A Chapter 13 is more involved because the bankruptcy attorney will be representing you for up to 5 years. On the other hand, a Chapter 7 should be over and done within a year at the most. For this reason, a Chapter 13 will almost always cost more than a Chapter 7.
For a Chapter 7 bankruptcy, lawyers charge generally between $750 and $2500, depending upon region and complexity of the case. For a Chapter 13, the bankruptcy lawyer may charge somewhere between $2000 and $4000, again depending on region and complexity. In most cases, the bankruptcy lawyer will not charge the entire fee all at once, and will allow you to set up a monthly payment plan.
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