Choosing to file bankruptcy is not an easy decision, but if you are struggling to pay back significant credit card debt it may be the right option for you.
While personal bankruptcy is often stigmatized, no one plans to go bankrupt. Often a life event significantly reduces income or increases bills, leading to a precarious financial situation. The three most common reasons for filing bankruptcy are divorce, medical bills and unemployment. If you are overburdened by debt, bankruptcy could provide you with much needed debt relief.
Chapter 7 versus Chapter 13
A Chapter 7 bankruptcy is the most common form of personal bankruptcy because it allows consumers to discharge most unsecured debt. Unsecured debts are debts without collateral, such as credit card debt. A Chapter 7 bankruptcy is the fastest form of bankruptcy, providing relief in a few short months. In order to be eligible for a Chapter 7, you must not have significant assets, your debts must total more than half of your annual income and you must have substantial unsecured debt that would take more than five years to repay.
By contrast, a Chapter 13 bankruptcy restructures rather than discharges debt and the debt must be repaid over a period of three to five years. The end goal of a Chapter 13 bankruptcy is to allow you to become current on secured loans, such as a mortgage, while resolving some debts. A Chapter 13 bankruptcy also protects co-signed debt by allowing the repayment to be restructured. In a Chapter 7, creditors can attempt to collect debt from co-signers even after one of the signers has been discharged from the debt through bankruptcy.
Exemptions and non-dischargeable debts
In Maryland, certain items are exempt from bankruptcy, such as disability benefits, tools of your trade valued up to $5,000 and personal property of up to $1,000. Additionally $6,000 in cash or personal property and $5,000 of real property can be exempted.
A key concern for those considering bankruptcy is the ability to protect assets such as a car or home. If you are current on your payments and the amount of equity for the loan is below the exemption limit the bankruptcy may allow you to keep your home or car. However, if either asset exceeds the exemption dollar amount limit the trustee could consider liquidating the assets to pay off debts.
Not every debt is dischargeable during bankruptcy. Non-dischargeable debts include taxes, child support, alimony and student loans. Also, any debts for injury or death caused by drunk driving cannot be discharged.
Financial hardship can happen to anyone. If you are being harassed or sued by creditors, bankruptcy can provide financial relief. Remember, bankruptcy is not an admission of failure. It is a financial reset allowing you to move forward with a fresh slate. Get your reset started today.