DebtHammer Newsletter #6: The Tools You Need to Become Debt-Free

For many people, bankruptcy seems like the answer to large amounts of high-interest debt, overextended credit, and even marital issues. If you’re considering it as an option, you’re not the only one. Hundreds of thousands of people file for bankruptcy every year. In 2021 alone, there were around 413,000 personal bankruptcy cases.

Bankruptcy has its benefits, but it’s not something you should take lightly. It can have lasting effects on things like your credit, marital situation, and assets.

If you’ve already exhausted every other option and are thinking about filing, ask yourself:

  • Which type of bankruptcy should I file?
  • Are there any other options for debt relief?
  • How much will it cost?
  • When all is said and done, is bankruptcy the best option for me?

Chapter 7 vs. Chapter 13 bankruptcy

Filing for bankruptcy doesn’t have to be extremely complicated, but it may not be as straightforward as you might think.

For one thing, there are two main types of personal bankruptcy: Chapter 7 and Chapter 13. Both options can help you get out of debt and regain control over your finances. The way they each go about it is quite different, though.

Chapter 7 bankruptcy

The majority of people who file for bankruptcy do so under a Chapter 7 at around 68%. The remaining 32% of bankruptcies are for Chapter 13.

When you file for Chapter 7, you usually have to liquidate (sell) off your assets to pay off any creditors or lenders. Anything you own can be considered an asset – property, cars, luxury clothes, art, etc.

That doesn’t mean everything you own will be sold, though. Some assets are protected by a bankruptcy exemption. Others may not be worth enough money to sell. This is something you can work out with your court-appointed bankruptcy trustee once you file.

Chapter 7 usually takes 4 to 6 months to complete. In the end, the court will discharge (eliminate) any remaining eligible debt you have, giving you a clean slate. Not all debt will go away, though. You’ll still be responsible for things like student loans, late child support payments, and federal back taxes.

Chapter 7 bankruptcy pros:

  • Wipes out most unsecured debt
  • Exemptions exist – for example, the homestead exemption lets you keep your property depending on how much equity you have in it
  • Can give your finances and debts a reset to get you a fresh start
  • May be cheaper and take less time than a Chapter 13

Chapter 7 bankruptcy cons:

  • May involve selling off your assets
  • You’ll need to pass a Means Test to see if you qualify (and make less than the median income in your state)
  • May result in losing your assets to pay off creditors

Chapter 13 bankruptcy

With a Chapter 13 bankruptcy, you’ll still work with a bankruptcy trustee. Instead of liquidating your assets, you’ll need to set up a repayment plan to tackle your debts over the next 3 to 5 years. If you follow through with the plan as intended, any remaining eligible debts will be discharged.

Not everyone qualifies for a Chapter 13. The court will factor in things like your income, current debts, and ability to pay to see if you’re eligible.

Chapter 13 bankruptcy pros:

  • Higher chance of keeping all or most of your assets, including your home
  • You have more time to tackle your debts through the repayment plan
  • Can consolidate your debts into one monthly payment
  • May look better on your credit report since you’re still repaying most of your debts
  • Falls off your credit report after 7 years

Chapter 13 bankruptcy cons:

  • Failure to make payments could result in the loss of assets
  • Will still damage your credit
  • You must be able to make the monthly payments on the repayment plan
  • Your bankruptcy trustee will control your spending for up to five years
  • There’s a maximum for how much debt you can have

READ MORE: Learn more about the pros and cons of filing for bankruptcy.

Is bankruptcy the best option for me?

This depends on your situation.

Bankruptcy isn’t right for everyone. It’s expensive, it takes time, and it has long-lasting repercussions on things like your credit.

But it can also help you lower or even eliminate unsecured debts – that is, medical bills, credit card balances, personal loans, payday loans, etc. Plus, if your credit is already damaged due to things like late payments and high credit utilization, bankruptcy can give you the opportunity to rebuild it faster than other debt-relief options. And there are ways you can minimize the costs.

Speak with a bankruptcy attorney before taking action. You may be able to set up a free consultation, which can give you a better idea of what you should do.

Looking for more information? Check out this article about the different types of bankruptcy.

Remember: There are other options for debt relief

Bankruptcy is one possible option for debt relief, but it’s not the only one. Here are just a few others to consider if you’re struggling with debt:

Survey: 27% of Americans have no emergency fund

If you don’t have an emergency fund, you’re in a risky situation. Financial experts suggest families save up at least 3 to 6 months’ worth of living expenses. That way, if there’s a financial emergency or unexpected expense (ex. medical bill, car repairs), they’re covered.

We recently surveyed 625 American consumers and found that 27% of people don’t have an emergency fund at all. Only 35% of people have a fully-funded emergency fund for sudden expenses.

Inflation’s still on the rise, and wages just aren’t keeping up. For around 23% of people, the only option seems to be short-term, high-interest payday loans and cash advance apps. Unfortunately, these short-term “solutions” just lead to more debt and budgeting problems.

So, what can you do about it? Start setting aside a small amount each month. This could be $10, or it could be $50. Whatever the case, it never hurts to be prepared – just in case.

If you want the full survey details, check it out here.

Coming next month

What you need to know about refinancing a mobile home, and should you take out a loan to buy cryptocurrency?

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