If you are wondering how much debt you need to get the ball rolling with bankruptcy, it might come as a surprise. You see, if your debt is less than $10,000 U.S., then you have what is called “non-dischargeable debt.” This means that even if you are successful in discharging most of your debts through bankruptcy proceedings, these outstanding debts will not be wiped off the books.
What about those people with more than $10k in outstanding balances? Well, there is hope for them yet! If your total amount of non-dischargeable debt across all credit cards and loans exceeds $10k U.S. (and there are a few exceptions), then you will be able to discharge your debts through avoidance procedures. Some of these procedures include the following:
1. Live Below Your Means (LBM)
2. Payment Plans
3. Make-A-Wish Foundation (if debt results from an illness or accident) and
4. Auto Financing Protection Plan (this is for automobiles only, not for homeowners).
The good news is that if you have credit card balances with balances that are less than 31% of your total credit limits or for which you make timely and consistent payments, then it could take just a couple of years before you hit the $10k U.S. limit.
The sad part about this is that if you are like most people, then your credit profile will be damaged and it can remain damaged for years.
This is due to how the lending industry keeps tabs on you. Essentially, they buy your credit report from the three major bureaus (Experian, Trans Union, and Equifax) each time you are approved for a new loan. This is done via a purchase order (PO). The purpose of this purchase order is to collect information on you and to make sure that they are getting their money’s worth by making sure you repay them in full at all times.
Chapter 7 bankruptcy vs. Chapter 13 bankruptcy
Chapter 7 bankruptcy, or “wage earner’s” bankruptcy, is a great way to get rid of debt and start fresh. In case you have never heard of a Chapter 7 filing, then here is a quick explanation of what it is all about.
Chapter 7 Bankruptcy allows total unsecured debts to be wiped off the debtor’s credit report once they pay off secured debts if they choose to do so. This can be accomplished by means of things like payment plans, but that is not the primary route used to recover from this type of bankruptcy filing.
Rather, the debtor will normally liquidate (sell off) whatever assets they can and take a lump sum of cash from the sale in order to pay off their outstanding debts. This is a great solution for those persons who find themselves in deep financial ruts, but the one downside is that most secured debts are not covered by this type of bankruptcy.
Chapter 13 bankruptcy is sometimes referred to as “reorganization” bankruptcy. This type of filing will lower monthly auto payments or give you extra time to pay off your mortgage if that is necessary. The good news about Chapter 13 filings is that they do not have to be made by businesses but can be handled on an individual basis. The bad news is that a credit report will reflect this type of filing for 7 to 10 years after the fact.
Due to the length of time that your financial history will be associated with a Chapter 13 filing, most people find this type of filing completely unacceptable, if not completely undesirable. This is because seven years from now, you might find yourself struggling financially again and need another solution to get rid of your debt problems. This means that you could lose out on a second chance at getting out from under your debt load if you use Chapter 13 filings to solve your financial problems today.
Just remember that Chapter 7 bankruptcies only erase unsecured debts, not secured debts. Secured debts are things like mortgages, car loans, and credit card balances that are backed (or secured) by assets such as real estate or collateral of some sort. If you have these types of assets and have a large debt pile to work through, then Chapter 13 is probably the best route for you to take in order to get rid of your debt load once and for all.
Chapter 13 bankruptcies allow people with large amounts of non-dischargeable debt to reduce the amount of money needed to pay off their non-dischargeable debt through repayment plans set up with their creditors. If you have a large amount of non-dischargeable debt, then this would be the best option for you to choose when filing bankruptcy because it will not leave your credit score tarnished for years.
If you are concerned about the reputation of your financial history once the bankruptcy is over, then Chapter 13 filings are not for you. If it is possible to get rid of all your non-dischargeable debt using a Chapter 13 filing and still having enough money to pay off secured debts, then that might be what you need to do. The good news is that there are people who can help guide you in this decision process so that you are aware of all your options.
You need to consider a lot of things prior to filing for bankruptcy. This is why it is always best to let an expert guide you through the process. Bankruptcy should be the final resort and not the first thing you try. It might seem like a good idea to file for it at first, but you will regret it later if you do.
If you are really struggling financially, then Chapter 7 bankruptcy is probably your best bet for getting rid of your debt so that you can start over with a clean slate. This is why most people who have used Chapter 7 filings have found that their credit scores improved after the bankruptcy was over, and this allowed them to get approved for loans on more favorable terms.