Bankruptcy 101: What Are Options When Filing For Bankruptcy?

When someone says the word “bankruptcy” the resulting expression is usually one of fear and opposition. Although it is not advised to declare bankruptcy without probable cause, for many Americans there is no other choice. However, bankruptcy is not as bad as it seems and people do it all the time.

So the first question to ask is, “When does one declare bankruptcy?” Based on your debt to income ratio or debt accumulation with astronomical interest rates, you may be able to determine whether filing bankruptcy is good for you or not. Rather than hiring a debt consolidation lawyer or fishing for debt consolidation companies, filing bankruptcy ensures legal action and settlement. Many people with unsecured debts are lured back into the never-ending cycles of payments without any solution or settlement in sight and debt collection companies expose unknowledgeable people by taking money and not settling.

That is why you need to listen to my next words, “Never settle with a third-party debt consolidation company unless they are experienced and reputable.” Some of the biggest scams occur when people start paying debt consolidation companies monthly payments and never see the money go towards the principle. These companies are just pocketing your money.

On the other hand, filing bankruptcy, by law, relieves you from your debt obligations and allows you to rebuild your credit over the course of the next three years. Other than your credit score, first and foremost always remember, unsecured debt collectors (credit cards) cannot come after you for obligations – but they sure can harass you unless you stop them. The only thing they can do is attempt to obtain retribution through the liquidation of your assets – don’t worry because you can just file bankruptcy.

There Are Only Two Types of Bankruptcies 

Chapter 7 Bankruptcy: This is the most common type of bankruptcy because most people who are declaring bankruptcy are doing so because it is their last available option. If you are one of these people you probably do not possess a ton of assets. Most of middle-class Americans during the financial crash lost everything and declared bankruptcy in which they were not obligated to pay any more unsecured debt and non-collateral engagements without losing property or selling assets. Chapter 7 clears all non-collateral debts (unsecured debts) with little to no repercussions in terms of selling assets or liquidating in order to pay back a portion of obligations. This is due to the nature of the bankruptcy, which exempts basic assets necessary for everyday life such as clothing, car, household, or furniture. You can hide your jewelry or claim nothing and without a warrant no one may search your home to see if you are lying.

So basically, long story short, you are covered and sent on your way with erased obligations. Sounds great, right? Well, there is always a catch to everything in life. The Chapter 7 bankruptcy catch is that you must truly have no “extra” assets and your debt to income ratio must be honorably problematic. This means if you are making $100,000 a year but only have $20,000 in debt, you cannot just say to debt collectors, “I do not want to pay this debt.” They will garnish your wages unless you can hide them from the courts. In addition, if you own a boat, Jet Ski, or other “extra” asset, the debt collectors may force you to sell that asset in order to salvage some of the debt obligation. My advice is always to state that you are additional assets are part of your company’s operations and put the registration documents under a corporation instead of personal ownership.

Chapter 13 Bankruptcy: If you understand Chapter 7 bankruptcy, Chapter 13 will be simple. If you do not qualify for Chapter 7 bankruptcy but still need help in settling your debts, Chapter 13 provides a repayment plan that details how you are going to pay back your debts over the next three to five years. The minimum payment is determined based on how much you earn, how much unsecured or secured debt you owe, and the amount debt collectors would have received if you filed for Chapter 7 bankruptcy. The total of these factors creates your monthly payment. Chapter 13 is the best option for people with valuable assets, secured debts with attached collateral who do not want to lose the asset (such as a car lease or second house mortgage), or who have manageable debt situations. For example, if you only have $15,000 in unsecured debt and $10,000 secured debt, Chapter 13 allows you to keep the secured debt asset (for example your car lease) while repaying missed payments over time that would have otherwise  led to repossession. In addition, the $15,000 is manageable debt, whereas $100,000 in debt may take more than 3 to 5 years to repay and Chapter 7 should just be implemented (but remember you may lose extra assets if you have them). Chapter 13 is a trade-off bankruptcy for people who do not want to lose everything, but if you do not have anything to start with outside the exempt properties, then Chapter 7 is the way to go.