How does bankruptcy work?

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The two most common types of bankruptcy filings are Chapter 7 and Chapter 13. In most cases, you’ll want to reach out to a bankruptcy attorney near you and schedule a consultation; most of them do this for free (so if they want to charge you, find a new attorney). Here’s how the process works:

Chapter 7

  • This is the best option, if you qualify. There are limitations per state. Whether you qualify depends on the number of people in your household and your combined income.
  • If you qualify, ultimately you can discharge all of your unsecured debt and owe nothing after the process is complete (typically 90 days).
  • Keep in mind that this will remain on your credit for 10 years; however, you can still get new credit card offers a few months after discharging, qualify for a home loan two years after discharge, and apply for federal student loans after three years.
  • Chapter 7 is a good option to quickly eliminate debts and still accomplish all your life goals before the 10 year mark on your credit disappears. Keep in mind that you can’t file Chapter 7 again for eight years.

Chapter 13

  • Chapter 13 is an organized repayment of debts that the courts sponsor.
  • A trustee will be responsible for your financial life for 3-5 years, establish a payment to themselves each month, and distribute a preset amount to your creditors (sometimes the full amount owed, and sometimes less than your total balance).
  • If you miss one of these payments, the plan is then canceled and you would have to start over from scratch with a different solution.
  • With Chapter 13, typically more than 70% of cases don’t complete the plan. This is because circumstances can drastically change over a 5 year period and emergencies can surface.
  • However, sometimes you can convert a Chapter 13 into a Chapter 7. Consult with a bankruptcy attorney about your situation for more information.
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