I received the following question from a reader:
Can you write a blog about bankruptcy one day? I'm baffled by the idea...how does someone's debt just discharged?
Well this takes me wayyyy back...to some class in undergrad where I learned the differences between all of the different types of bankruptcy. While the idea seems simple, it's not as easy to file bankruptcy and be completely dischraged of your debts as you think. Let's take a look:
There are a few chapters of bankruptcy (7, 11, 12, 13), only one chapter discharges ALL of one's debt (chapter 7). The other chapters are for debt restructuring...where you pay off as much as you can with your disposable income and your remaining debt gets restructured to make it more feasible for you to handle.
Chapter 7 bankruptcy is the most commonly filed chapter. This chapter discharges all of your debt with the exception of, taxes, penalties and fines administered by the government, alimony, child support, and student loans. Additionally, the court uses your assets to pay off as much of your debt as possible. This means, even though you lose your debt, you lose ALL of your assets too (except the exempt ones...which are few and far between). However, you can't just file Chapter 7 bankruptcy all willy nilly. You have to be able to qualify by showing that you really cannot afford to pay your debts. If a Bankruptcy Trustee reviews your financial situation and decides that you can pay some of your debt with your disposable income, they can deny your ability to file Chapter 7 and instead force you to file the second most common chapter...13.
Chapter 13 bankruptcy is a financial reorganization organized by the federal court. Basically, the bankruptcy court lays out a plan for an individual to pay off their debt. It's like going to rehab for debt. It still comes with a 10 year credit report punishment, in which you cannot obtain any new loans/financing.
Regardless of what chapter you file, filing bankruptcy is NEVER glamorous. It comes with painful years of horrible credit which could wreck more havoc on your life than you'd think.
Reader, hopefully this has helped your understanding of bankruptcy a bit better.
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