Types of Bankruptcy Protection

Types of Bankruptcy Protection

Many people working on credit repair have a bankruptcy in their past. Over 1.2 million bankruptcies were filed in 2012 alone. But, even many of those who have filed do not know very much about the process, the long term consequences, or what each type of bankruptcy entails. Read on to learn a bit more about the most common types.

To undergo either type of bankruptcy, you will have to go through credit counseling. There are agencies in each state approved by the United States Trustee’s office. You will also need cash for filing and administration fees.

Chapter 7 – Liquidation Bankruptcy

Chapter 7 is the most common type of bankruptcy, accounting for three quarters of filings last year. Under this type of bankruptcy, all qualified debts are discharged. One of the benefits of a Chapter 7 bankruptcy is the “automatic stay.” Once you’ve filed, creditors cannot garnish your wages, go after your bank account, repossess your car or foreclose on your house until the process is finished. So, it can give you time to make new plans while everything is being resolved.

Not everyone qualifies for Chapter 7. You cannot use Chapter 7 bankruptcy if you’ve already had another bankruptcy discharge within the past 6 to 8 years. And, after undergoing a means test, your income, debt burden and expenses show that you could manage a the repayment plan that comes with a Chapter 13 bankruptcy, you may be required to file that form instead.

A Chapter 7 bankruptcy stays on your credit record for 10 years. However, the full impact will not stay on your credit that long. Older discharged debts will fall off sooner (usually after 7 years) meaning that your credit rating will start to rise even before the bankruptcy disappears from your credit history.

Chapter 13 – Reorganization Bankruptcy

In Chapter 13 bankruptcy, you are able to keep many assets but have to repay your debts back over a three to five year span of time. The advantage is that you can usually keep your home and car, even if you have fallen behind on payments. Typically, you will only have to partially repay debts that are included in a Chapter 13 bankruptcy.

Another advantage of a Chapter 13 bankruptcy is that it drops off your credit record in 7 years instead of 10. This can be a boon to those who want to proceed with home purchase plans sooner.

No matter which form you consider, bankruptcy has a profound affect on your credit rating for a number of years. It takes time and work to rehabilitate your credit so that you can move on with new credit and bigger plans like home ownership. By carefully managing your finances, you can get relief from debt and get back to financial health.