How Bankruptcy Works

One of the options that consumers in serious financial stress often consider is bankruptcy. Though a drastic option, it does work for some consumers. However, choosing bankruptcy over other debt relief options is not the right choice for all consumers. There are two types of bankruptcy that a consumer can file for. These is Chapter 7 and Chapter 13 and the following is a description of how bankruptcy works.

Chapter 7 bankruptcy filers seek to erase all debt. The way this works is that a consumer in debt trouble basically gives all his property, except very specific non-exempt property, over to a bankruptcy trustee who sells the property to pay back the consumers debtors. Consumers can also give the equivalent in cash to the trustee to be used as payment to the debtors.

There are some advantages to a Chapter 7 bankruptcy. Collections calls stop as soon as this type of bankruptcy is filed. Wages are no longer garnished. It also removes liens from properties. And for consumers who have no assets, they become debt-free without paying anything.

However, there are a lot more disadvantages to a Chapter 7 filing. This type of bankruptcy stays on the consumer's credit record for 10 years and on the court records for 20 years. Private employers can actually use a person's bankruptcy filing as a reason for not hiring them. During the months of processing this type of bankruptcy can take, a trustee is basically in charge of all the economic decisions of the consumer. Additionally, this type of bankruptcy does not absolve the consumer of his school loan responsibilities or from paying back taxes. Finally, consumers who file bankruptcy often feel depressed, embarrassed and ashamed.

Chapter 13 bankruptcy is different than Chapter 7 since in this type of filing, the consumer actually goes under a payment plan with this debtors. The consumer agrees to have a trustee manage his disposable income to pay back debtors for a set monthly amount for up to five years.

The advantages of this type of bankruptcy are that a consumer can use the monthly plan to get back on track with car loan, school loan or even mortgage payments. There is only one monthly plan. And the consumer stops receiving collection calls once bankruptcy is filed.

Like with Chapter 7 bankruptcy, there are many disadvantages related to this type of filing. This filing stays on record for seven years and it shows up as a bankruptcy in the credit report. The consumer in this type of filing must pay back a large amount of the debt with additional interests and the trustee's fee, which can be large. The court decides what amounts to disposable income, and it is very strict about it, which can make it hard to manage and continue with the program. Because the cost of paying back the debt through Chapter 13 bankruptcy can be so high, about 50 percent of those who file do not complete the program at all.

Consumers need to be very careful when choosing bankruptcy as their option for debt relief. They need to consider if these types are truly best for them and will allow them to get back on their feet financially.