The term bankruptcy is commonly defined as utter failure or impoverishment, according to Merriam-Webster. In legal terms, bankruptcy has a somewhat different meaning and is usually used when someone has become unable to pay their creditors and honor their financial obligations.
Chapter 7 or Chapter 13
In the United States, the most commonly used forms of bankruptcy today are Chapter 7 and Chapter 13. Under Chapter 7, an individual is required to either pay for or forfeit any property named in the bankruptcy filing. In Chapter 13, however, a payment plan can be established which will allow the debtor to retain some of their property and pay it off according to a structured payment plan approved by the bankruptcy court.
What type of debt is not applicable to bankruptcy
No matter which form of bankruptcy being considered, it is important to understand how the act of filing bankruptcy may affect you and your financial situation. One of the most important factors to be considered is that some types of common debts are not able to be cleared by a bankruptcy filing. These include:
- any income tax debt you owe, including penalties and fines
- student loans of all types
- debt for back child support or alimony payments
It is important to also note that it is never a good idea to take on addition debt immediately before filing bankruptcy. Expensive purchase made at this point, such as cars or jewelry, will not be allowed by the court to be part of the bankruptcy filing.
What happens after bankruptcy
The bankruptcy process does have lasting effects that must be considered before filing. These include being unable to qualify for a mortgage for up to four years and having to completely rebuild your credit rating, a process that can take several years.
Another serious issue that must be considered before filing for bankruptcy is that it will be recorded forever in public records. This means that prospective employers, nosy neighbors, banks, and any businesses you seek to do business with will have access to this information. Insurance providers can use a record of bankruptcy to assess you a higher risk rating, forcing you to pay more for car, home, and other types of insurance. Prospective employers can view this as a character issue and choose to deny you a job based on these records.
Even though there are some important negatives, filing bankruptcy can still offer many positive advantages for those who are deeply in debt, with no options to pay their creditors. When considering bankruptcy, it is important to seek out the advice of a reputable debt consolidation attorney like James Alan Poe, P.A. before making a final decision. This type of professional can counsel you about your specific situation and help you make the best choice for you.