People in Maryland who are confronted by financial challenges might automatically dismiss the idea of bankruptcy. There are ingrained beliefs about the bankruptcy process and what happens to a person’s finances in the aftermath. However, many are misunderstood or completely unfounded.
If a person is dealing with overwhelming debt and the seemingly endless messages and calls from creditors about what they owe with no obvious way out, it is wise to take a serious look at bankruptcy and give it legitimate consideration. The first step to this is knowing how the process works and what the real impact will be.
Chapter 7 and Chapter 13 have different paths
Depending on a person’s situation, there are two primary avenues for getting relief through bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 is called a liquidation bankruptcy. The name alone tends to make people pause before they move forward with the process. The idea of losing all their property can seem worse than simply paying whatever they can and hoping to eventually clear the debt.
In truth, people can retain much of their property after a Chapter 7. Most debtors who use Chapter 7 are listed as having no assets. This will be true even if they own an automobile. It could be exempt so the debtor can retain it. It is the same for other properties provided they are below a certain value. If a person has properties that are not exempt, they will need to be surrendered so the trustee can sell them and repay creditors.
With Chapter 7, the process is relatively fast. Unsecured debts like credit cards and medical expenses can be wiped out so the debtor will receive a new financial start. The benefits from Chapter 7 start immediately upon filing as there will be an automatic stay preventing creditors from making contact or initiating actions to collect on what is owed. The debtor must fulfill all the requirements including taking a financial management course and proving their income with the means test. After getting beyond these hurdles, the debts can be cleared in a matter of months.
Chapter 13 is not completed as quickly, but there are more options to retain property. It is for people who own a home, have automobiles and other assets they want to retain but would be lost in a Chapter 7. It is often compared to a consolidation loan where the debtor pays a certain amount they can afford over three or five years. Their income will dictate the duration.
This is beneficial because it can reduce what is owed to a level they can afford. The monthly payments are sent to the trustee who will distribute it to creditors. The person’s income is critical when filing for Chapter 13. The financial management course is mandatory with a Chapter 13. After the payments are completed, the debtor can receive a discharge. They can then move on without the onerous debt that had been looming over them.
Bankruptcy can restart a person’s financial life
A credit score will be damaged by a bankruptcy filing, but people need to think about how falling behind on their payments or being unable to pay what they owe was also damaging their credit. After bankruptcy, it is possible to slowly rebuild credit and get into a better financial situation. The bankruptcy will remain on the person’s credit report for seven years with a Chapter 13 and 10 years with a Chapter 7.
Regardless, the mental, emotional and financial relief that people experience after a successful bankruptcy filing can be worth any short-term obstacle that accompanies it. When thinking about viable strategies to reduce and eliminate debt, it is unwise to dismiss bankruptcy out of hand because it can be a useful path to getting on stronger financial ground.