If paying down your debt has become an insurmountable challenge, filing bankruptcy can help you get your finances back on track. Chapter 7 bankruptcy allows you to eliminate any amount of debt, including credit cards, medical bills or personal loans. Chapter 13 allows you to pay your debts down over time. Whether or not you should file bankruptcy ultimately depends on how much debt you owe, your income and the value of your assets.
Chapter 7 Eligibility
Your eligibility to file Chapter 7 is based on your income rather than your debt. There is no minimum amount of debt needed to claim Chapter 7 and no limit as to how much secured or unsecured debt you can include in your filing. While you can file Chapter 7 with as little as $500 in debt, the costs of filing typically exceed the benefit you would get by discharging the debt. As of June 2012, the Chapter 7 filing fee was $306, according to the U.S. Courts. If you plan to hire an attorney to assist you with your filing, you could end up paying hundreds or even thousands of dollars in legal fees.
Filing Chapter 13
Chapter 13 bankruptcy gives you a three- to five-year window for repaying your outstanding debts. The federal bankruptcy code currently doesn't require Chapter 13 debtors to have a minimum amount of debt in order to file; however, there are limits as to how much debt you can include in your bankruptcy. As of June 2012, Chapter 13 debtors could claim a maximum of $360,475 in unsecured debt and up to $1,081,400 in secured debt. The limits are adjusted annually, but if your debts exceed the amount allowed under the bankruptcy code, you may have to consider Chapter 7 if you can't work out a payment plan with your creditors.
Treatment of Assets
In addition to considering the amount of debt you have, you should also weigh the potential impact on your property and assets that filing bankruptcy may have. In a Chapter 7 case, your debts are wiped clean, but you will be expected to turn over any non-exempt assets to the court for liquidation. The amount and type of property you can exempt depends on your state's bankruptcy law. In a Chapter 13 filing, you get to keep all of your assets, but you must continue to make your debt payments on time until your repayment plan is satisfied.
While filing bankruptcy can ease the burden of your debt, it can also have long-term consequences for your finances. Chapter 13 bankruptcy can stay on your credit for up to seven years and Chapter 7 can be reported for up to 10 years. If you have a relatively small amount of debt, the Utah Bar Association recommends researching alternatives to bankruptcy, such as consumer credit counseling. A non-profit credit counseling organization can evaluate your debts, income and expenses and offer advice on other options besides bankruptcy.
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