As one of the most feared words in both the dictionary and the financial space, bankruptcy is a very serious matter and one that is extremely difficult to bounce back from.
First off, just how does bankruptcy occur?
Bankruptcy is due to debt and to put it even more clearly, debt that hasn’t been managed and reached a state of being out of control.
When does bankruptcy occur?
It occurs when both debt consolidation and debt settlement have tried to analyse and assist your debt problem but failed to do so within the time frame of five years. Sometimes, a debt settler or consolidator will advise you that it’s better to declare bankruptcy than try and pay your creditors back. That only occurs when you’ve hit a bad state of debt and cannot find a way to them back.
Generally, bankruptcy laws were adjusted and rewritten to give individuals a chance to fix their debt status. This was primarily implemented for those who experienced financial troubles such as losing their jobs, an illness that allowed for immense medical bills and a divorce. Filing for bankruptcy when you know you can’t find any way to pay back your debt is not necessarily a negative thing, but can assist you and stop foreclosures, debt collections and wage garnishing to get rid of debt.
When legal action is taken against you it can be a scary thing and declaring bankruptcy might just assist you with getting out of your situation.
Two main types of bankruptcy
- Chapter 7 bankruptcy – This type allows you to receive a chance to receive a court judgement. This ultimately retracts you from paying your debt and allows for you to keep your key assets that are considered as exempt property. There will, however, be a list of your assets or possessions that will be sold to pay back a part of your debt. In some cases, depending on which laws are implemented, you may be able to keep most, if not almost all your possessions. Exempt property includes your home, main car, pensions, work/ business equipment, veteran’s benefits and retirement savings. These can thus not be sold to pay off your debt. Non-exempt property includes cash, stocks, investments, bank accounts, a secondary car and a secondary home.
- Chapter 13 bankruptcy – Making up roughly about 30% if individual bankruptcy filings, it involves repayment of some of your debts. This type is declared by those who do not qualify for Chapter 7. Filing for Chapter 13 is only applicable if the individual’s debts do not exceed a specific amount. When under Chapter 13, one must create a 3-5-year payment plan for all creditors. Once this plan is implemented, followed through and completed, you will be debt-free.