How Do You Make The Better Bankruptcy Choice?
Declaring bankruptcy is never something you think you’ll have to do, but it can happen. It’s not all bad, though, and can actually be a step in the right direction to getting your finances back on track when your debt has spiraled beyond your control. Here are some tips about how to decide whether Chapter 7 or Chapter 13 bankruptcy best suits your needs.
Unsecured Versus Secured Debt
The type of bankruptcy you declare mostly depends on the type of debt you have. Seasoned bankruptcy attorney Darrell Castle summarizes the difference between unsecured debts and secured debts as whether they’re backed by collateral. In other words, unsecured debts include things like credit cards and unpaid medical bills, versus debt for property such as a house or car.
There's also two different types of bankruptcy that go with these debts. Chapter 7 is usually used to discharge unsecured debt, whereas Chapter 13 is used in the case of secured debt. Chapter 7 discharges debts you can't pay, but Chapter 13 allows you to keep the property that you own without it being seized by the bank. This type of bankruptcy involves a repayment plan and terms that can help you get back on track while retaining your personal property. Generally speaking, the better bankruptcy choice for you is largely determined by whether your debt is secured or unsecured.
Consider Your Cosigners
When you declare Chapter 7 bankruptcy, although there's a stay on collection activities taken against you, that doesn't mean that your cosigners and guarantors are also protected. Your lenders can continue to attempt to collect the debt from them. However, according to Nolo, you can help protect cosigners by either reaffirming the debt, though it’s not recommended, or continuing to pay off discharged debt after filing for Chapter 7. Although you may be free of collections attempts, you can still pay off the same debt instead of forcing the responsibility onto your cosigners.
On the other hand, if you file for Chapter 13 bankruptcy instead, Nolo also points out that there's a condition called a Codebtor Stay. This basically means that your cosigners on consumer debts are protected. Depending on your personal situation, this can make a big difference in whether you opt to go with Chapter 7 or Chapter 13 bankruptcy.
The Next Step
Once you get the basics of bankruptcy down, you have a good foundation to begin the process of filing. However, you should always consult an attorney who can guide you through the process. Although these two types of bankruptcy seem relatively straightforward, knowing the legalese of different conditions on your debt repayment or discharge is essential to make sure you make the best decision going forward. The more swiftly you take action, though, the faster you can start to repair your finances and credit.
Bankruptcy can happen to anyone at any time for any reason. Whether you’re someone who’s been irresponsible with credit cards or you’ve run into major medical expenses, bankruptcy may be the correct choice for you in the long run.