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What is Bankruptcy?

Bankruptcy is a legal process that helps consumers and businesses (in bankruptcy they are called “debtors”) eliminate or repay their debts under the supervision of the United States Bankruptcy Court. The two most common types of bankruptcy are: Chapter 7 (frequently described as a “liquidation”) and Chapter 13 (described as a “reorganization”). A Chapter 13 bankruptcy stops foreclosure and often can be used to save your home, strip off a second mortgage, reduce car payments, and discharge (i.e. eliminate) credit card debt. However, if you decide to let your house go, you can still use a Chapter 7 to discharge credit card debt and to avoid IRS cancelled debt tax liabilities. Both types of bankruptcy offer an opportunity to eliminate most of your debt and to get a fresh start.

What is Chapter 7

A Chapter 7 bankruptcy is called a liquidation because if the debtor has non-exempt assets, they are turned over to the bankruptcy trustee who then converts them to cash for distribution to the creditors.

In the majority of cases, however, the debtor has no non-exempt assets and very little, if anything, is transferred to the trustee for the benefit of the creditors. A Chapter 7 yields a relatively quick “fresh start,” as the debtor typically receives a discharge of all dischargeable debt within four months.

What is Chapter 13

Chapter 13 bankruptcy is called a reorganization because it requires debtors to pay back the non-dischargeable portion of
their debts over a three to five year period. The advantage of a Chapter 13 is that you can often keep your home, repay the arrears on your 1st mortgage over time, as well as get rid of credit card and other unsecured debt. In many instances, you can also strip off a 2nd or 3rd mortgage, and significantly reduce your car loan payments. Chapter 13 is only an option for individuals who have income sufficient to pay their reasonable living expenses with some amount left over to pay off their debts.

What are the Main Pros and Cons of Bankruptcy?

The primary purpose of bankruptcy is to give a person who is burdened with debt, a fresh start by wiping out a substantial portion of his or her debts. A bankruptcy, however, can stay on your credit report for as long as ten years (for a chapter 7) or for seven years (from filing date for a discharged Chapter 13) by law.  Many people are able to rebuild their credit well before that.

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