What Chapter 7 Bankruptcy Can Do for Debtors

May 23, 2016 by

After the Great Recession of 2008-09, many Americans found themselves in financial crisis – the nationwide effect of mass lay-offs, reduction in income, underemployment and prolonged unemployment. Adding to these were other factors which contributed to the worsening of an individual’s financial situation, such as hospitalization, injuries due to an accident, natural calamity and divorce. All these factors can result to successive failures in paying monthly bills, including mortgage, personal loans, car loan, child support, alimony or spousal support and credit card bills. Due to lapses in payment debts only keep on getting bigger so that settling everything becomes an impossible task.

The pay of millions of wage earners in the U.S. is just enough to cover their basic needs and afford them a simple life style. Loss of job or reduction in pay, even for just a month, can very well be the start of a crushing debt crisis for them. This debt crisis, however, will not be the only source of pressure and stress which they will suffer. After only about three months of continuous lapses in payment of their loans, banks would already consider their loans as bad debts; a major reason for their account to be referred to a collection agency which never shy away from using hounding tactics just to make them pay. This means people calling any time of the day, especially during the late hours, receiving calls even at work and informing other workers about their debt, receiving emails, text messages, and/or letters/notices from law firms. Some collection agencies even go to the extent of requesting the court for garnishment of a debtor’s monetary compensation (until the entire debt is paid) or for a bank levy, which is the freezing of a debtor’s bank account.

Having debts, however, regardless of how big it is, does not need to be a cause of worry to debtors due to the Bankruptcy law, the government’s way of helping people find ways to pay their debts and, so, regain control of their financial situation. This Bankruptcy law or Bankruptcy Code was passed by the U.S. Congress in 1978; it replaces the Nelson Act or the Bankruptcy Act of 1898. There are various chapters under the Bankruptcy Code, one of these is chapter 7, also called Liquidation bankruptcy.

Chapter 7 bankruptcy, the bankruptcy chapter most commonly applied for, is specifically designed for individuals who have properties, but whose income falls within the limit set by the chapter. Under this chapter, a debtor will need to surrender his or her “non-exempt” properties for liquidation. If the surrendered property is a business firm, he or she will also have to cease operation of such firm. Included in the list of non-exempt properties are a vacation home or a second house, bonds, stocks, cash, and other forms of investment. Properties that may not be surrendered (“exempt” properties) include a house, clothing, necessary household appliances, a vehicle or vehicles but only up to a certain value, personal injury compensation, tools, including expensive musical instruments, that are necessary to the debtor’s trade or profession, and jewelry (up to a certain value).

All properties to be liquidated are to be under the charge of a court-appointed trustee. After the trustee has paid all the debts that need to be paid (these are called “non-dischargeable” debts), such as spousal support, child support, government-imposed penalties, court fees, student loan, debts resulting from wrongful death or personal injury, and taxes that are not more than 3 years old since they first became due, the remaining amount (if there is any) will have to be returned to the debtor. Creditors, on their part, will have to accept whatever legally determined amount they are paid, even if this amount falls short of what is actually owed them. This means that they will have to forgive the debtor of any remaining balance and waive their right to make any more collection or payment or suffer severe penalties under federal law.

As mentioned on the website of Ryan J. Ruehle Attorney at Law, LLC, “Chapter 7 bankruptcy offers the near-total liquidation of all debts that an individual may hold, giving those who pursue this option the ability to start their financial life anew.” Many people, however, find Chapter 7 quite complex due to all the legal issues it contains

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Affect of Credit on Bankruptcy

Jan 23, 2016 by

Maintaining a good credit score is one of the main concerns when people are trying to deal with their debts. Protecting your credit score would mean easier and faster transactions particularly in mortgages, loans, and credit cards and will be a major factor in whether you get approved or not and the amount of charges you might incur (in interest rate). This is the reason why choosing the right option for dealing with debts is important to avoid future financial restrictions and concerns.

There are three available options in dealing with debt: debt consolidation, debt settlement, and bankruptcy. Debt consolidation offers the chances of paying your creditors through one workable payment after all the debts are added together and computed to determine a fair monthly payment. It is a viable option only if you earn enough income to repay your debts; likewise your credit score will be greatly affected because debt consolidation will render you technically compliant to your obligations with your creditors and the negative record can stay with you for a very long time.

On the other hand, debt settlement offers the legal protection provided by bankruptcy without having to pay for all of your debts. You will be making a monthly payment (called a war chest) to a debt settlement company who will then send a proposal to your creditors stating you will are willing to pay for your debts but only with a lofty discount. Generally, creditors will be greatly against the idea, but may agree to the conditions hereafter. However, the danger of scam debt settlement companies is a serious risk and your credit score will still suffer significant impact because your records will show you paid your debts in less than the actual value. It will be treated as not paying your debts, which can significantly impact your credit score.

Many people choose to avoid bankruptcy because of the belief that it will be damaging their credit score, but it may be a better option in many situations. Filing for either Chapter 7 or Chapter 13 bankruptcy will have the same effect to your credit score and they provide a better solution for those who already have lower credit scores. This is because you will have the chance of rebuilding your credit scores after the bankruptcy. It is important to note, though, that your bankruptcy will stay on your credit report for no less than 10 years, so it might be a factor that financial institutions will look into when extending your credit.

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