Is Bankruptcy Really the Answer?

When you’ve lost your job, racked up too much credit card debt or can no longer make mortgage payments, what options are there to help out? For many Kentuckians, the answer is often filing for bankruptcy. In 2019, Kentucky had almost 15,000 Chapter 7 or 13 filings, and 64% of those were Chapter 7 filings.

For people who are facing financial ruin, with skyrocketing medical bills from illness or a recent divorce, bankruptcy filing can offer a way out. And for many of them, bankruptcy can help them recover financially without ruining their credit.

Liquidation or Repayment?

In individual bankruptcy, two chapters of Title 11, called the bankruptcy code, are possible. Chapter 7 bankruptcy is called the “liquidation” chapter. For individuals, a trustee is appointed by the court to inventory all property in the estate and sell any real or personal property that is not exempt in order to pay debts owed to creditors.

Not all property can be liquidated, however. Debtors can claim some property as exempt from liquidation. They can also receive a discharge in which they are not be responsible for paying certain debts such as medical debt, credit card balances or personal loans.

Chapter 7 wipes out most debt, effectively giving filers a fresh start. The only debt that cannot be cancelled are alimony payments or child support, student loans and some taxes. The debtor can even hold onto secured debts like a car or home by signing a reaffirmation agreement. Under these circumstances they cannot file for bankruptcy again for 8 years.

In Chapter 13 bankruptcy, debtors file with the intention to repay their creditors out of future income. They may keep their property and propose a plan for repayment, paying a trustee who distributes payments to creditors for a small fee. After repayment of most debt, debtors are given a discharge of debt.

Will Bankruptcy Ruin My Credit?

Filing for bankruptcy does not have to ruin your credit. A Chapter 7 bankruptcy does stay on a debtor’s record for many years. But because the debtor’s filing and relief only take about 6 months, any property acquired and wages earned afterwards can help them immediately to begin a new chapter in building credit.

Although a Chapter 13 bankruptcy can stay on someone’s record for up to 7 years, the debtor steadily rebuilds his credit as he pays off debt through the restructured payments.

Getting informed advice will help to determine which kind of bankruptcy is best for your individual needs.

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