For many years, bankruptcy has been viewed as a way out of a financial disaster. After all, it allows those deep in debt a way to start over and rid themselves of heavy financial burdens. This has been particularly true for homeowners stuck in bad mortgages that have drained the family finances. However, before exploring this potential option, here are a few things you should know about bankruptcy and why it may or may not be a viable option for your situation.

What is bankruptcy?
Bankruptcy is characterized by a person’s inability to pay incurred business or personal debts. Many people who have to resort to bankruptcy are simply unable to handle their financial obligations and must go through the legal process of having them either dismissed or reduced. In many instances, the assets of the debtor are liquidated to ensure they no longer are liable for the debts they owe.

Most courts only recognize two main forms of bankruptcy: voluntary and involuntary. An involuntary bankruptcy occurs when a lender or credit organization files a petition in court against the borrower in an attempt to get back some of the money loaned.

Voluntary bankruptcy occurs when the debtor realizes he is in financial trouble and will be unable to get out of it. The debtor declares in court that he is not able to meet his obligations and the court either orders a payment plan or releases the debtor from the debt all together.

The Difference Between Bankruptcy Chapters
The two kinds of bankruptcy chapters that can be filed in court are Chapter 7 and Chapter 13.

Chapter 7 bankruptcy allows the property and other assets of the debtor to be liquidated in order to meet some of the financial obligations owed. Usually, the court will allow the debtor to keep some of the proceeds of the liquidation to start over again, financially speaking. Adversely, Chapter 13 allows the debtor to restructure the debt and orders the creditors to give a longer period for the debt to be paid (usually about three to five years).

However, it is important to note that not all forms of debt are covered by declaring bankruptcy. The main types of debt that are covered include medical bills, any kind of unsecured loans and credit cards. However, before determining that declaring bankruptcy is the best course of action for you, consult with a financial advisor to better understand the bankruptcy laws in your state.

The qualification standards between the two types of bankruptcy vary. When filing for Chapter 7, you must be willing to lose all of your assets, including your home, during the liquidation process. Chapter 13 allows you to maintain everything you have while allowing more time for you to meet your financial obligations.

Contact your attorney or financial advisor about whether or not Bankruptcy is the answer for you. Rescue My Loan cannot advise you on Bankruptcy decisions, but if you decide to go with a Loan Modification or Loan Workout instead, we are here to help.