Many people that find themselves in difficult financial circumstances may believe bankruptcy is the best way for them to regain control of their money. Despite the advertisements and websites offering to help consumers through the process, many people do not understand how it works and what the long-term ramifications are. It is not a decision to be made lightly. Since it may affect credit ratings for up to ten years, consumers that are considering it should take the time and do some research.
What is Bankruptcy?
Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Generally, a debtor declares bankruptcy to obtain relief from debt, and this is accomplished either through a discharge of the debt or through a restructuring of the debt. One should consult a lawyer that specializes in this area of law to walk them through the process and there are various legal aid centers available if hiring an attorney is not affordable.
Chapter 7 Bankruptcy
The first step is to decide whether to file Chapter 7 or Chapter 13. Though there are other types of bankruptcies, these are the most common for consumers. Chapter 7 works by allowing individuals to discard debt by liquidating their assets to pay off their debts, thereby allowing them to get a fresh start. A court-appointed trustee reviews the paperwork submitted by individuals and their creditors. They decide which assets will be liquidated, and how the proceeds will be divided.
Chapter 13 Bankruptcy
When filing Chapter 13, the goals and guidelines are a bit different. The individual and their attorney develop a repayment plan for each creditor. If this plan is approved by the court, each creditor receives the agreed upon payment. This plan may be set up for incremental payments over time for up to five years, after which remaining eligible debts are discharged.
Bankruptcy is not the only option for individuals who are overwhelmed with debt. In more recent years, other options have been developed that do not have as severe repercussions on credit standings. These options may not require the expense of an attorney and the effect on credit scores is generally not as significant. Debt consolidation programs help reduce monthly payment, interest rates and waive late fees. These programs help individuals avoid bankruptcy and speed the processof resolving debt. Debt settlement programs focus on unsecured debt, which is primarily credit card debt. Monthly payments may be significantly reduced. Debtmerica, through its affiliated partners have been providing financial relief to individuals for 2006.