Debt is more like a companion that is with you all the time like a nagging person. It is in credit cards, car loans, medical bills, student loans, and the like you find in debt nowadays. This comes as a result of debts accumulating, and when people feel that paying their debts is becoming harder, then they consider taking bankruptcy as an easy way to have their debts erased so that they can start afresh. However, bankruptcy cannot always be the correct answer or even means making debt vanish into thin air.
What Is Bankruptcy?
Bankruptcy is a legal process based on federal law that allows consumers and businesses, that are in a state of financial distress due to debt to either rearrange their debts that are owed or have some of the debts that are qualifying erased. There exist two major classifications of the personal bankruptcy filings known as Chapter 7 and Chapter 13. The advantages and disadvantages of each type are as follows.
Chapter 7 bankruptcy cancels eligible assets by selling off the non-exempt ones in the best effort to repay creditors while eliminating the rest of dischargeable debts such as credit, medical bills, personal loans, and so forth, yet some assets like cars, homes, retirement funds, and any other property under state exemption laws may remain with the filer. Bankruptcy generally is reported to credit bureaus for as long as 10 ye. rs.
On the other hand, Chapter 13 can give you the right to keep an asset like a house or a car, but the debtor has to repay the creditors in a period between 3-5 years through a plan that has to be approved by the court. As per the discharge, outstanding dischargeable liabilities that are unpaid are expunged after the payment process. Unlike Chapter 7 which eliminates all kinds of credits, Chapter 13 remains on credit reports for up to 7 years too.
Debts That Cannot Be Discharged
However, bankruptcy provides debt relief in most cases, and certain types of debts cannot be discharged, meaning that you are liable for this debt even in case of declaring bankruptcy. These commonly include:
- Child support and alimony are two related and distinct forms of financial relief that are dealt with under the same procedural regime.
- Present federal and state taxes
- Student loans
- Mortgages and auto loans are two versatile consumer credit products that can be used to leverage fixed assets to gain access to credit.
- Penalties and fines are paid by the offenders who were found guilty of the crimes that were committed in society.
- Fraudulent debts
According to one estimate, Chapter 13 repayment plans are still leaving 50-70% of people owing the majority of original student loan balances because of accruing interest. According to statistics from 2018, this type of debt with more than $1.5 trillion was owed in America alone, and for many, this debt does not leave the body after bankruptcy.
There are always other options which are available to people who wish to avoid going through the process of bankruptcy.
Though it is a way of having some or all of the debts cleared, bankruptcy significantly affects credit scores and future borrowing rights. That’s why other consumer debt relief options may be smart alternatives: That’s why other consumer debt relief options may be smart alternatives:
Debt Consolidation Loans – It is a financial product that helps you to repay several high-interest rate debts with one low fixed-rate installment loan which is convenient and will save you the equivalent of several dollars while repaying for debts in the form of one monthly payment.
Debt Management Plans – Some credit counseling agencies have tools to negotiate with creditors to lower, freeze, or wipe out interest rates and fees, and develop reasonable payment plans to pay off balances.
Debt settlement – Companies in this category work for the debtors and negotiate with creditors to pay reduced amounts amounting to 50% to 60% of the outstanding balance. But this will affect credit scores and therefore any impact on taxes should be considered in the option.
Lastly, bankruptcy makes it possible to wipe out many financial errors and start afresh, and hence it is considered as being effortless. However, the long-term effects that it has and the absence of balance through debt discharge for liabilities such as student debt are other approaches that may enable you to be free from debts but responsibly. It is always advised to seek the services of a non-profit credit counselor or a financial expert as they can advise you on what is best in your case
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