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Understanding Bankruptcy Options

Understanding Bankruptcy Options

If you are struggling with debts and can't keep your creditors at bay, then bankruptcy may seem like an inevitable outcome. After all, bankruptcy laws are designed to provide debt relief in such situations, but they are not without consequences. Before proceeding into bankruptcy, there are a number of things you should understand about the process.

There are different legal forms of bankruptcy, and some types of debt are treated differently from others. While bankruptcy may represent your only path toward debt relief, before you head in that direction you should know a little about what lies along that path. The more you understand the process, the better able you will be to weigh it against other debt relief options.

Principles of Bankruptcy
In principle, bankruptcy laws are designed to create an orderly process to resolve bad debts. They impose settlements between debtors and creditors, and can help prioritize the claims of multiple creditors.

This form of debt relief is not designed to give the debtor a free pass. The process is likely to involve an examination of the debtor's assets and income to determine how much of this can go to paying off existing debts. While some debts that can't be paid may be discharged as a result of the process, there are certain obligations that the bankruptcy process will not take away. These include federal student loans, tax debts, and spousal or child support.

Forms of Bankruptcy
The three forms of bankruptcy available to individuals are Chapter 7, Chapter 11, and Chapter 13. The following is a summary of some of the major differences:

  • Chapter 7 bankruptcy is for the most extreme cases, where debt burdens are too high, and/or income too low, for a realistic course of debt repayment to be worked out. It requires that property be liquidated to pay off as much of the debt as possible, though some personal property such as clothing may be exempt. While some remaining debts may be discharged, this process basically means starting over with next to nothing.
  • Chapter 11 bankruptcy is designed to reorganize debt burdens to put the debtor on a realistic course toward repayment. While it can leave property intact, it is an expensive and complicated process which is usually pursued by businesses rather than individuals.
  • Chapter 13 bankruptcy is something of a hybrid between the above two approaches, and is only open to individuals. Where income levels are sufficient, and debt levels not too burdensome, it is possible that a repayment plan can be worked out without resorting to full liquidation of property. This is typically a three-to-five year process involving credit counseling. It may result in some debts being discharged rather than repaid, but it may also entail the liquidation of some property.

The above is just an overview, so you should consult a bankruptcy attorney before entering into bankruptcy. A bankruptcy attorney can help you decide which form of bankruptcy is appropriate for your situation, and can also help you understand any particular regulations which may apply in your state.

Above all, keep in mind that while bankruptcy is one way to clear up bad debts, it has lasting consequences. Be sure to consider all other debt relief options before settling on bankruptcy.

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