Before you make your final decision about whether bankruptcy is the right answer to your debt problem, you need to keep some things in mind about the bankruptcy process. First of all, you may be surprised to learn that there is more than one type of consumer bankruptcy. The two most common types are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is the kind that most people think about because it is meant to completely eliminate your debts. This process takes place in exchange for liquidation of some of your assets. The upside is that you will hopefully be able to eliminate most if not all of your debts, but you may have to give up some of your possessions to help pay off creditors.
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In practice, however, most people who declare bankruptcy don't have many non-exempt assets to speak of anyway. Your primary residence, as well as your home's furnishings and your vehicle, are usually protected by your state bankruptcy exemptions.
Chapter 13 bankruptcy, on the other hand, does not ask you to give up your assets. Instead of eliminating your debts completely, you are asked to commit to a repayment plan during which you will make monthly payments for a few years. The good news is that you rarely have to end up paying all of your debt. You'll probably end up paying only a small fraction of the original loan.
How do you decide between these two types of bankruptcy? First of all, you should discuss things carefully with a bankruptcy lawyer. Secondly, it depends on your situation. One of the most important factors is whether you have an asset that you want to keep but would end up losing in Chapter 7 bankruptcy.
Let's say you have an investment property which is not your primary residence. This would not be protected by your homestead exemptions in your state, so the only way to keep the house safe from creditors would probably be to file Chapter 13 where you promise to pay back some of your debt.
Also, Chapter 13 can help protect your primary residence as well. You see, your homestead exemptions protect your home from unsecured debts like credit cards and medical bills, but your home is still vulnerable to the mortgage company or bank! Choosing Chapter 13 can help you catch up on mortgage payments so you don't have to lose your home.
This article has covered some of the fundamental differences between these two types of bankruptcy proceedings. You must, however, talk things over carefully with your attorney so you can end up making the best decision for your family.
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