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Reasons to File for Bankruptcy
by Ryan Carson
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Overview
Both Chapter 7 and Chapter 13 bankruptcy offer the struggling consumer federal protection from adverse action taken against them by their creditors. The filing of bankruptcy immediately prohibits creditors from any debt collection efforts, and offers consumers a valid path to achieving a financial fresh start. The most common reasons for filing are outlined below.
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Debt Relief
The most obvious reason for filing bankruptcy is to be released from liability from some or all unsecured debts. For many consumers, credit card bills, medical bills and personal loans not attached to property can be discharged in bankruptcy. The level of income may influence how much, if any, unsecured debt may be discharged in bankruptcy. The forgiveness of unsecured debt may be available in both Chapter 7 and Chapter 13.
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Debt Reorganization
When a high level of income requires the repayment the of some or all of a consumer's unsecured debt, he may still benefit from the protection of bankruptcy. Chapter 13 bankruptcy enables a consumer with even high levels of income to reorganize her debt under a five-year repayment plan. A bankruptcy filing stops penalties and interest rates from accruing, and may allow the consumer a more feasible option to satisfy his financial obligations.
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Stop Garnishment
Both unsecured creditors and taxing authorities may seek judgments against a debtor for the amount owed on a claim. An entry of judgment enables the creditor to impose a garnishment against the debtor's wages, in some states as high as one-third of his gross monthly income. Bankruptcy prevents and ceases most garnishments. While some claims may require repayment even in bankruptcy, the terms may be more favorable under the protection of bankruptcy.
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Stop Repossession
Property protected by the bankruptcy estate may not be repossessed by creditors to satisfy a delinquent claim. In fact, in many states, the filing of bankruptcy within a specific time after a repossession may even allow the debtor recovery of the repossessed collateral. The debt against the property must be satisfied through a bankruptcy payment plan, although the the contract may be renegotiated to more favorable terms.
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Avoid Foreclosure
The most common reason for filing Chapter 13 bankruptcy is to avoid foreclosure on real property. Chapter 13 immediately stops actions to foreclose and offers the homeowner an opportunity to repay any arrears owed on the property through a monthly payment to the Chapter 13 Trustee. However, bankruptcy does not alleviate the obligation to continue to make timely mortgage payments once the case has been filed.
