According to law, there are two categories of personal bankruptcy: reorganization (chapter 11, 12, and 13) and liquidation (chapter 7). In a chapter 7, a trustee collects the non-exempt property of the debtor, sells it, and distributes the proceeds to the creditors. When filing for Chapter 11, 12, or 13, the debtor may use future earnings to pay creditors. The main difference between filing Chapter 13 personal bankruptcy and a Chapter 7 personal bankruptcy is that Chapter 13 enables a debtor to retain certain assets that would otherwise be liquidated in Chapter 7.
Under bankruptcy law, the first step is filing a petition in court. A debtor files a statement of assets and liabilities and schedules listing creditors. After filing, your creditors are prohibited under bankruptcy law from taking any action to collect discharged debts. This is stated under law 11 U.S.C. § 1301. If a creditor listed in the schedules attempts collection, the debtor should inform the creditor he has filed for personal bankruptcy and request that the creditor cease collection.
For many, filing for personal bankruptcy seems like the easiest way out. It should be a last resort. This filing is the worst thing you can do to your credit and it can stay in your credit file for upto ten years from the day you file your papers. Credit grantors are free to consider a filing when evaluating you for a personal loan. Some issuers of credit may extend credit only after a number of years have passed, or is has fallen off your credit report. Obtaining a personal loan after bankruptcy isn’t easy and will cost you more in interest rates and fees. A personal loan after bankruptcy may even have to be secured.
There are other obvious negatives with filing. One problem with chapter 13 is that in some cases you could end up paying back 50% or more of the debt. Under the law, if you miss a payment you could end up in breach of court and forced to repay the whole debt. The law limits your personal spending after filing chapter 13 to items considered essential. The majority of debtors don’t complete their Chapter 13 repayment plans. Although most people filing chapter 13 assume they’ll complete their plan, only about one third do. A chapter 7 may stay on your credit longer than a chapter 13. Here you would be paying nothing back to your creditors. If you own a home with significant equity, have assets to protect, or have co-signers to a loan, you cannot file chapter 7. If passed, recent bankruptcy law proposals will make filing even more difficult.
In some cases filing bankruptcy is necessary. However, as you can see from the information presented, it should be avoided if possible. With more difficult law and the difficulty in later securing a personal loan, filing is truly a last resort. A competent debt reduction company can reduce your debts to a manageable level so you don’t have to proceed with it.