by Matthew Perry
(last updated February 21, 2009)
Applying for bankruptcy will cost you lots of money, both in application fees and lawyer fees; it will take a decade to recreate a good credit score, and you may lose property or belongings to satisfy part of your debt. Generally, you don't want to declare bankruptcy unless you have no hope of paying off your debts in the next five years or so, but if your particular situation is complicated, you may want to consult a professional to find if bankruptcy is the best option for you. In the meantime, here's an overview of the two main types of bankruptcy, chapter seven (VII) and chapter thirteen (XIII).
Chapter VII: Title seven bankruptcy is sometimes known as liquidation bankruptcy because if you file for it, all of your non-exempt possessions will be sold (liquidated) to pay as much of your debt as possible. Exempt items can include cars, houses, clothing, and jewelry that are below certain value levels (exact numbers vary from state to state), with everything else, including secondary properties and anything exempted item worth more than the limit, up for grabs.
If you're in circumstances which make bankruptcy an appealing option, the chances are that you won't have much that isn't exempt. However, if you have significant non-exempted items, you may be better off with other options, such as debt renegotiation.
Title XIII: Title thirteen applicants have to have a regular income, whether from a job, social security, or other sources. This type of bankruptcy is aimed at people with both extreme debt and unexempt properties they don't want to lose. Some people find it particularly useful because filing for title XIII bankruptcy will stop a mortgage foreclosure in its tracks. The debt to be discharged cannot be over a set limit which changes periodically. The debt limit for fixed items, such as cars and homes, is different from the limit for unfixed debt from credit cards and other sources. The flexible debt limit is considerably lower than the fixed debt limit.
Bankruptcy can work wonders with some kinds of debt—especially credit card debt—other debts don't get touched by it. Student loans, alimony, child support, and most kinds of tax debt will hang after other debts get discharged, as will debt from any loans obtained fraudulently. If you don't have any of the exempted debts, bankruptcy will leave you completely free, unless you come in to money through inheritance, divorce settlement, or other unforeseen means. One of the best features of bankruptcy is the automatic stay—from the moment you file for bankruptcy until the moment the process is concluded, creditors are no longer allowed to harass you.
All in all, declaring bankruptcy is a drastic step and should be done with care and thought. Alternatives such as credit negotiation may be better ways to get out of debt, although
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