Bankruptcy is a valuable tool for individuals from all income backgrounds. However, a cloud of misconceptions surrounds it.
Examples of such falsehoods include that bankruptcy is only for financially irresponsible individuals (most bankruptcies are due to uncontrollable circumstances such as healthcare bills) and that those who file for one ruin their credit forever (it only remains on the filer’s credit record for a set period). One myth that causes many to fear bankruptcy is that those who file for one lose everything.
There are two kinds of consumer bankruptcy
Chapter 7 bankruptcy and Chapter 13 bankruptcy exist to help consumers discharge their debt. They operate in different ways, which means the filer may lose some assets depending on the kind of debt he or she has and which one he or she files for, but not everything.
Chapter 7 bankruptcy works by first putting a hold on certain debts and then assigning a trustee to sell any non-exempt property to pay back creditors. After a period, non-secured debts (no collateral involved) end up discharged. Non-exempt property typically includes house equity, automobiles and tools and possessions that do not exceed a certain value limit.
Chapter 13 bankruptcy does not result in the sale of property. Instead, a trustee reorganizes existing debt and develops a repayment plan.
The kind of bankruptcy to file depends on individual circumstances
Many individuals prefer Chapter 7 bankruptcy since it discharges debts such as unpaid credit cards and utility bills. However, Chapter 13 bankruptcy results in less loss of property and may suit those struggling with something like a mortgage more. Chapter 7 bankruptcy also has an income limit determined by a Means Test.
Bankruptcy does not cost individuals everything. Rather, it gives them a new start in life by helping them clear their debts, though certain ones, such as back child support payments are non-dischargeable.