Sunday, April 20, 2008

Bankruptcy (Financial) - The Three Types of Bankruptcy

There will be times in life when some people find they have bitten off more than they can chew financially. It is during these times that bankruptcy may be the only choice. Bankruptcy is offered by the federal government as a way to eliminate the debt a person or couple has entered in to. But, the effect on the financial status and credit score of the filers can be devastating, at best.

There are three different methods of filing for bankruptcy, each with a different set of rules and potential outcomes. The three bankruptcy types are Chapter 7, Chapter 11 and Chapter 13. Each type is based upon a different chapter in the book or guide to bankruptcy laws and regulations, thus the naming of these chapters in filing terms.

Chapter 7 is the most commonly filed bankruptcy chapter for individual and non business entities. During Chapter 7, the filer will report all bills, debts and financial obligations that they wish to have discharged from the legally binding contract entered upon. These debts may include, but are not limited to: medical bills, home loans, car loans, student loans, and credit card debt. Some debts may need further and more aggressive legal processes than others. Student loans, for instance, are much harder to discharge than credit card debt.

After filing for Chapter 7, the court will rule either in favor of the discharge or against the discharge. Once the discharge of debts has been approved, the debtor will no longer be held responsible for the charges and debts filed in the court documents. Chapter 7 can only be filed once every 7 years and will remain on the credit report of all involved for a maximum of 10 years.

Chapter 11 is aimed more at the business than the individual. During Chapter 11, the court system freezes the debts of the business and applied a court appointed payment pay to repay the debtors in a timely fashion. When a business files for Chapter 11, they are allowed to continue business as usual and retain profits, as long as the payment plan set up by the court system is maintain in good standing.

Chapter 13 is similar to Chapter 11, but aimed toward individuals and not businesses. Chapter 11 bankruptcy appoints a trustee to the filer's debt basis. The trustee will manage and "watch" the debt while the filer repays the debtors what is owed. During a Chapter 13, the filer will be allowed to exempt certain belongings and debts from the filing, thus giving a bit more freedom to repay the debts under supervision they so choose, while leaving other debts out of the court system.

All forms of bankruptcy carry high financial risks for the filers. In addition to these financial risks, filers will have to pay court costs, attorney fees, and other associated fees that may come up during the filing process. All forms of bankruptcy will be reported to the credit agencies in a negative manner.

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