Individual debtors frequently file for bankruptcy under Chapter 7 or Chapter 13 of the Bankruptcy Code, and either course can provide more pros than cons for certain debtors. To file under Chapter 7, you must meet certain income qualifications, but under Chapter 13, you must follow a repayment plan over three to five years. At the end of either type of bankruptcy, you may receive a discharge, or elimination, of certain remaining unpaid debts.
Both types of bankruptcy provide the debtor with an automatic stay – or postponement – of collection proceedings. This means creditors must stop all collection efforts until the bankruptcy court says otherwise. This includes foreclosure proceedings. Under Chapter 13, debtors may have a chance to catch up on past due mortgage payments, thereby avoiding foreclosure. If the debtor can remain current on his mortgage payments, he will likely be able to keep his home.
One of the biggest pros of either type of bankruptcy is the discharge of debt that comes at the end of the bankruptcy case. A discharge releases the debtor from all personal liability for many debts, even if they were not paid in full during the bankruptcy proceedings. However, the debtor must successfully complete all required steps of the bankruptcy case, including financial counseling, before the court will grant his discharge.
Unfortunately, filing for either type of bankruptcy can lower a debtor’s credit score and remains on the debtor’s credit report for up to 10 years. This may make it very difficult for a debtor to obtain a loan, particularly when the bankruptcy is recent. Additionally, some employers run credit checks on prospective employees and a bankruptcy may indicate a lack of financial responsibility to the employer.
Since Chapter 7 bankruptcy is based on the sale of non-exempt property, with the funds from the sale used to pay creditors, the court-appointed bankruptcy trustee can seize and sell some of the debtor’s property. Depending on your state, you may find that exemptions cover the property you most want to keep, but if there is no exemption for it, some property you treasure may be sold to pay creditors.