Bankruptcy has helped many debtors eliminate debt. In majority of the cases, debtors file Chapter 7 or Chapter 13 bankruptcy. However, the new Bankruptcy Laws that were introduced in October 2005 have made it difficult for debtors to file bankruptcy as the eligibility criteria have been made tougher. The new Bankruptcy Laws were introduced to curtail the number of debtors filing bankruptcy.

How will Chapter 7 bankruptcy help you to eliminate debt?

As per the new bankruptcy laws, you have to undergo a Means test to find out whether you qualify for Chapter 7 bankruptcy. Your income is compared to the median income of a similar household in your state. If the results of Means test indicate that your income is less than the state median income, you will be eligible to file Chapter 7 bankruptcy.

Chapter 7 bankruptcy is managed by a court appointed trustee that monitors the proceedings. Your non-exempt assets are liquidated or sold so that the cash that is received from the same can be used to pay off the creditors. The whole proceeding usually takes 4 to 6 months to help you eliminate debt. There are exemptions you can enjoy which may be either state or federal exemptions and a debtor cannot opt for both.

How will Chapter 13 bankruptcy help you to eliminate debt?

If you fail to qualify for Chapter 7 bankruptcy, your bankruptcy attorney may suggest you opt for Chapter 13 bankruptcy. Referred to as reorganization bankruptcy, you get a repayment plan and you are expected to pay off your debts according to the repayment plan. You should have sufficient income that will enable you to make payments for your debts. As per the new bankruptcy laws, the repayment period is now 5 years instead of 3 years.

According to the new bankruptcy laws, credit counseling session has been made compulsory. Irrespective of whether you’re filing Chapter 7 or Chapter 13 bankruptcy, you need to take credit counseling session at least 180 days before you file bankruptcy. The credit counseling session will make you aware of the bankruptcy alternatives that can help you to eliminate debt. Once the credit counseling session is over, you get a certificate which states that you have successfully completed the credit counseling classes and a repayment plan. At the time of filing bankruptcy you will require both these documents.
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Bankruptcy helps you to eliminate debt but does it help your credit rating?

Bankruptcy will undoubtedly help you in eliminating debt but it has a negative impact on your credit rating. It gets recorded in your credit report for a period of 7 to 10 years. You won’t be able to take fresh credit and lenders will usually avoid working with you. However, credit repair is one way in which you can make your credit rating look up so that you regain your financial freedom again.

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