When a borrower is unable to repay his or her debts, the best option may be to file for bankruptcy. There are two types of bankruptcy and there are advantages and disadvantages to both.
Chapter 7 bankruptcy
When a borrower files for Chapter 7 bankruptcy, also called a liquidation bankruptcy, creditors are stopped from collecting money from the borrower, including garnishing the borrower’s wages. This includes debts like medical bills, personal loans and credit cards.
One of the advantages to this type of bankruptcy is that the borrower is not required to repay his or her creditors and most household items are also exempt, like clothing, furniture, homes and cars. This means that the borrower may be allowed to keep those items, however one disadvantage is that he or she will still likely have to continue paying the mortgage and car loan.
Chapter 13 bankruptcy
A Chapter 13 bankruptcy allows borrowers to keep their property, but requires that they make a plan to repay the debt on a monthly payment plan. The money is then distributed to the borrower’s creditors and is usually a three-to-five-year plan.
The amount the borrower repays may depend on his or her assets, income, the size and type of debts and the property he or she owns. This may be the right type of bankruptcy for borrowers who have consistent income and can make regular payments.
Borrowers who file for bankruptcy are still responsible for paying child support, spousal support and filing correct tax returns.
An experienced attorney can help borrowers decide which type of bankruptcy may be the right fit for their circumstances.