When you are struggling with overwhelming debt, bankruptcy may be the best option to get a fresh start. However, the type of bankruptcy you file — Chapter 7 or 13 — determines how your debt is handled. It also affects how long it takes to recover from bankruptcy and how it impacts your credit.
Generally, if you file for bankruptcy, it will stop all legal action against you by creditors. This includes garnishments, lawsuits and collection calls. It also stops foreclosures and repossessions of cars and other property. In some cases, you might be able to catch up on past due mortgage payments.
The bankruptcy process also reorganizes your debt into a repayment plan that lasts three to five years. Your disposable income — the amount left over from your monthly expenses after taking into account allowable bankruptcy deductions — will be paid toward your debt in the repayment plan. This is why Chapter 13 is often called a wage earner’s plan.
If you qualify to file for Chapter 13, it’s likely that your creditors will agree to a lower payment amount than what you currently owe on your debt. This decrease in what you owe is known as a “cramdown.” For example, when it comes to car loans, you might be able to secure a reduced balance by paying only the depreciated value of your vehicle.
You might also be able to reduce the amount of debt you owe on your home mortgage through a cramdown, which lowers the principal by reducing the value of your house. You might be able to lower your student loan payments, as well.
However, while you might be able to get rid of most of your unsecured debt through Chapter 7, you will have to pay back some of it in your repayment plan with Chapter 13. Additionally, you will have to repay any amounts you owe on non-dischargeable debts, such as newer income taxes or spousal/child support arrearages.
Ultimately, the best way to decide whether to file for Chapter 7 or Chapter 13 bankruptcy is to consult with a qualified Cain and Herren Hawaii bankruptcy attorney. They will take a look at your budget, credit and debts to help you make the most of your bankruptcy filing. They will also inform you about what the process will entail and how it might impact your credit score. A bankruptcy will remain on your credit report for seven years, but the effects diminish over time as you make good-faith efforts to pay your debts. If you still cannot manage your debts, you might consider other options to help you resolve them, such as credit counseling or a consumer proposal.
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