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Filing For Bankruptcy: Which Plan Is Right For You?
The majority of people who file for bankruptcy opt for Chapter 7, which wipes out most unsecured debts. (Unsecured debts are those that aren't linked to specific property, such as a car or a house. So your mortgage is a secured debt; your credit card bills are unsecured.) Filing a Chapter 7 bankruptcy can mean you have to give up some of your assets (property or cash) to pay your creditors. In reality, most Chapter 7 filers aren't required to give up anything, either because they don't have any assets or because the property they have is "exempt" or protected from creditors. The exemptions vary by state, but they might include household furnishings, clothing, tools you need for work, retirement accounts, and some - or all - of the equity in your home. If you want to keep property that isn't exempt, you can still file for bankruptcy, but you typically must choose Chapter 13. Chapter 13 requires debtors to come up with a plan to repay all, or most, of their debts within five years. If they successfully complete their plan, they're allowed to keep their property while having any remaining debts erased. Unfortunately, most people fail to complete their Chapter 13 plans, and their cases are either dismissed, allowing creditors to resume collection activities, or converted to Chapter 7s. A bankruptcy filing can make sense if any of the following apply: 1. You can't pay back most or all of your unsecured debts in three to five years. 2. You don't have much equity in a home or vehicle or much other property to speak of. 3. You do have considerable equity in a home or vehicle or other valuables that wouldn't be exempt in bankruptcy - jewels; family heirlooms; valuable artwork or collections; or stocks, bonds, and cash held outside a retirement plan - but you're willing to agree to a Chapter 13 repayment plan rather than a Chapter 7 liquidation. Bankruptcy might not make sense if any of these apply: 1. You could repay your debts within five years. 2. Most of your debts are the kind that can't be wiped out. Debts that typically can't be erased include student loans, child support, and recent taxes. You might still decide to file so that you can free up more money for these debts, but the disadvantages of filing might well overwhelm the advantages. 3. You defrauded your creditors by hiding assets, say, or lying about your income or debts on a credit application. 4. You recently ran up large debts buying luxuries, which can include vacations and entertainment. If you did so while you were clearly broke, that can constitute fraud. If you ran up the bills and then lost your job, you might be able to file for bankruptcy on other debts, but the luxury debts might not be wiped out. 5. You want to file a Chapter 7 liquidation bankruptcy and received a discharge for a previous bankruptcy filing within the past six years. (You can file for a Chapter 13 repayment plan bankruptcy at any time.)
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