You may face many challenges in becoming debt-free. The concept itself works, but following through means paying off everything that you currently owe to creditors. You may suffer a few setbacks in life that make it impossible to pay anything timely. Once you get behind, you end up owing more in interest and late fees. When debt begins to mount and your financial situation sours, you may consider filing for bankruptcy. The process is foreign to those who have not gone through it. Understanding your options may help you decide how to move forward with shedding your debt.
What Does Bankruptcy Do?
When an individual files for bankruptcy, it means they can no longer afford to pay the money owed to creditors. A bankruptcy court appoints a trustee to work with creditors and oversee the appropriate action. The trustee is a neutral party and works to ensure that debts get paid according to the type of bankruptcy path you go down. The result of any bankruptcy should be a discharge of remaining debts. This allows you the chance to start over financially. Bankruptcy cannot wipe out all types of debt, such as IRS and federal student loans. However, it can allow for a restructuring of these debts.
What Is Chapter 7?
Chapter 7 bankruptcy is probably the one with which you are most familiar. This process involves paying off some of your debts by using your assets. You must file under Chapter 7 if your income is limited and you cannot afford to make payments. The trustee will go through your creditors and prioritize the ones that get paid. Secured debts, such as mortgages, are always first in line to receive payments. Unsecured debts, such as credit cards, get the last of it. You do not have to sell your house or vehicles during Chapter 7, but you may have to sell any second homes or recreational vehicles. If the value is not there, a trustee will suggest returning the items to the creditors.
What Is Chapter 13?
Chapter 13 bankruptcy allows you to establish a payment plan to pay back a portion of your debts. Your income qualifies you for this type of process. The trustee will help you select a plan that you can complete within five years. If you fulfill the terms of the Chapter 13 payment plan, the remainder of your debt will be discharged. This type of bankruptcy works for individuals who do not want to sell off assets and who have the income to qualify.