Deciding to file for bankruptcy is a significant step, often taken when financial pressures become too great to handle through other means. It’s a decision that requires understanding the different types available, mainly Chapter 7 and Chapter 13 bankruptcy, and knowing which one you qualify for.
Why Do People File for Bankruptcy?
Individuals typically file for bankruptcy due to overwhelming debt, unexpected medical expenses, unemployment, or other financial crises. It’s a legal tool that offers a fresh start by either liquidating assets to pay off debts or creating a manageable debt repayment plan.
Chapter 7 vs Chapter 13 Bankruptcy: What’s the Difference?
Chapter 7 bankruptcy involves liquidating your assets to pay off creditors. It’s suitable for those who can’t afford to pay their debts and/or have no assets to pay off their debts. Chapter 13 bankruptcy, however, is a repayment plan that allows you to keep your assets and pay your debts over a three to five, (3-5), year period of time. It’s geared towards those with a regular income.
Common Bankruptcy Requirements
Both types of bankruptcy require complete transparency about your financial situation, including income, debts, expenses, and assets. This information helps determine your eligibility and the bankruptcy chapter most suited to your situation.
Qualifying for Chapter 7
To qualify for Chapter 7, your income must be below a certain level. This is determined through a means test, which compares your income to the median income in your state for your household size. If your income is too high, you might not be eligible for Chapter 7.
Qualifying for Chapter 13
For Chapter 13 bankruptcy, you need to have a regular income and your total debt must be below specific limits. This type is suitable if you can manage a repayment plan and want to retain your assets.
Chapter 7 vs Chapter 13 Bankruptcy: Impact on Your Credit
Filing for bankruptcy has a significant impact on your credit score. A Chapter 7 bankruptcy can remain on your credit report for up to 10 years, while Chapter 13 can stay for about 7 years. This can affect your ability to obtain credit in the future.
Rebuilding Your Credit After Bankruptcy
Rebuilding your credit post-bankruptcy involves starting with small, manageable lines of credit and consistently making payments on time. It’s a gradual process that requires financial discipline and responsibility.
- Obtain Your Credit Report: Understanding your credit history is the first step to rebuilding your credit. Obtain a free report from all three credit bureaus and review it thoroughly for any errors or discrepancies.
- Budget and Save: Create a budget and stick to it. This not only helps in managing your money but also in saving for emergencies.
- Timely Payments: Make sure to pay all your bills on time. Consistent, timely payments can significantly improve your credit score over time.
- Secured Credit Card: Consider getting a secured credit card, which is typically easier to obtain after bankruptcy. Use it for small purchases and pay the balance in full each month to demonstrate financial responsibility.
- Installment Loan: Once you’ve managed your secured card well, consider applying for a small installment loan. Repaying it on time will further boost your credit.
- Monitor Your Progress: Regularly check your credit score to monitor your progress and ensure your financial habits are leading to improvement.
- Avoid New Debt: Steer clear of incurring new consumer debt, like a large car loan or credit card debt. This includes resisting the urge to open multiple credit accounts too quickly.
- Be Patient: Rebuilding credit is a slow process, which requires patience and persistence. Stay committed to your financial plan even when progress seems slow.
Exceptions and Exemptions in Chapter 7 vs Chapter 13 Bankruptcy
Bankruptcy laws include specific exceptions and exemptions. In Chapter 7, for example, certain assets may be exempt from liquidation. Similarly, some debts may be non-dischargeable. Understanding these aspects is crucial for making informed decisions about filing for bankruptcy.
Get Back on Track Fast with The Mellor Law Firm
Navigating bankruptcy can be overwhelming, but at The Mellor Law Firm, we’re here to help you understand the nuances and make informed decisions. Our team of experienced attorneys will guide you through the bankruptcy process and help you get back on track financially. Contact us today for a consultation!