Written by Charlotte Wood (last updated February 21, 2009)
When I think of bankruptcy, I initially think of being broke and going to a last resort. When you declare bankruptcy, you officially state that you are unable to pay your creditors and most of those debts are cleared. While it may seem like a simple concept, bankruptcy is actually as complicated a financial process as any other. There are different forms of bankruptcy, each one providing you with different options and resulting in varying financial consequences and circumstances. If your current financial situation is such so that you're considering bankruptcy, make sure you understand the different types of bankruptcy so you can make the decision that's best for you.
There are four different types of bankruptcy: Chapter 7, Chapter 11, Chapter 12, and Chapter 13, the most common of which are Chapters 7 and 13.
If you file a Chapter 7 bankruptcy, you liquidate all your debts. You state that you are virtually incapable of paying off your creditors and give up your land and/or possessions as a result of that statement. Property is the most common form of creditor compensation in a Chapter 7 case. Say you're defaulting on a mortgage or car loan, but still want to keep your house or car, you shouldn't file a Chapter 7 bankruptcy because chances are that property will be taken from you. You would want to opt for another form of bankruptcy.
Chapters 11 and 12 of bankruptcy claims are not usually claimed by an average debtor and are the least common. A Chapter 11 case deals with businesses or exorbitantly high individual debts and is called "reorganization." A Chapter 12 case is strictly for family farmers.
The other kind of bankruptcy that you'll be most likely to file if you ever do file bankruptcy is a Chapter 13 case. With Chapter 13 cases, you opt to go on a payment plan covering three to five years and commit to making those payments without fail. This kind of bankruptcy is best for you if you're in danger of losing your house, if you're significantly behind on financial obligations but can catch up given time, or if you have valuable, non-exempt property but still can pay out of your income for a while.
The biggest thing to remember with Chapter 13 bankruptcies is once you commit to paying off those debts according to your plan, you have to do it. Don't forget to factor in your other financial obligations and necessities when agreeing to this plan. Your payments can easily be a tad higher than a mortgage payment and you need to make sure you can afford the debt payment along with your other immediate responsibilities.
Bankruptcy is a solemn financial matter and one that should be considered with the utmost care and contemplation. You need to make the right choice for you and your family, figuring out the best way for you to relieve yourself of debt. Paradoxically, bankruptcy can get you on your way to financial freedom, but you need to use prudence not only in your day-to-day money transactions, but with the type of bankruptcy you file as well. If you know what's available to you then you'll be able to make a educated decision that can bring you back into the black!
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