The reality is that bankruptcy, like many other things in life, can be utilized and exploited in each of the aforementioned ways. Nevertheless, whether the bankruptcy code is used by some people for the wrong reasons, as a result of irresponsible credit habits, or as the last resort of desperate, hard-working, honest people in financial trouble due to circumstances beyond their control, bankruptcy is an essential component of modern economics and a necessity for the business community as a whole.
Without some form of relief from overwhelming debt, alternatives, such as literal prison or the unforgiving choice between purchasing sustenance and paying a debt, the societal consequences are counterproductive. Firstly, the economic costs of incarcerating an insolvent individual would be immense. Second, a creditor is unlikely to receive payment on a debt while the delinquent is incarcerated; consequently, the creditor remains unpaid. Lastly, if defaulting on a debt resulted in imprisonment or malnutrition, the credit industry in contemporary society would not exist.
In reality, bankruptcy is equally essential to creditors and debtors who require relief from creditors. Insolvency affords the debtor the opportunity to reconstruct shattered financial circumstances. Once a bankruptcy petition is filed, creditors can stop paying obnoxious idiots to harass debtors over the phone in an attempt to extort money from people who have no money (what part of """"BROKE"""" don't they understand?).
Creditors are now aware of their available options. If they believe that the schedules or financial statements in the debtor's petition are fraudulent, they can attend the creditor's meeting and query the debtor, or they can file an adversary proceeding against the debtor to recover their debt. In addition, there are a large number of individuals willing to assume debt and from whom creditors can sell their products, largely as a result of the availability of bankruptcy protection in case of emergency and the assurance that a default will not result in incarceration, poverty, or homelessness.
There are three types of bankruptcy applicable to the majority of individuals. They are known as Chapters. Chapters 7, 13, and 11 are involved.
Chapter 7 is the most compact, straightforward, and inexpensive variety. A Chapter 7 bankruptcy will discharge all debts that are promptly dischargeable. All secured creditors (mortgages, car payments, lease or rent obligations) must be paid in full if you wish to retain your home, car, or residence.
Even if you're current on your payments and have a zero balance, it's probable that your credit card account will be closed. If you want to keep a credit card with a zero balance, the best course of action is to contact the issuing card company and explain that you will be filing a bankruptcy petition but would like to keep the account.
There is no law that requires a credit issuer to keep the account open or end it, but the vast majority of credit issuers have a policy of closing the account. However, a credit card account may withstand bankruptcy in some instances.
Generally, after filing for Chapter 7 bankruptcy, a cash-and-carry policy must be adopted while the financial situation is improved, followed by a gradual reestablishment of credit. Improving credit scores is straightforward and typically takes a couple of years.
Chapter 13 bankruptcy is typically avoided by debtors due to its size, duration, and cost, but it can be advantageous for those who do not qualify for Chapter 7. There are certain actions that may be taken under Chapter 13 that cannot be taken under Chapter 7. Despite the additional time and expenses, Chapter 13 can be an attractive option due to the aforementioned factors.
Among these include:
(1) Lien Stripping - If the value of the house is less than the amount owed on the first mortgage, a homeowner may be able to """"strip"""" the junior liens in a chapter 13 (the 2nd and 3rd Trust Deeds) if the value of the home is less than the amount owed on the first mortgage.
(2) Curing Mortgage Arrears - In Chapter 13, if the debtor's finances have improved but not enough to cure the arrears in time under an acceleration clause on the mortgage, the debtor may have up to five years to cure the arrears if he can manage the Chapter 13 plan payments in addition to the regular monthly mortgage payments and ordinary expenses. During the Chapter 13 plan period, the debtor will not be required to pay any other dischargeable debts (e.g., credit card bills, medical bills, etc.).
(3) Tax issues - A Chapter 13 bankruptcy can be an attractive option for stopping penalties and interest on non-dischargeable taxes (i.e., income taxes that are not yet old enough to be discharged or employer payroll taxes unpaid during the operation of a business, etc.).
Chapter 11, also known as a business reorganization bankruptcy, is the least prevalent of the three types of bankruptcy. However, some individuals whose secured or unsecured debt exceeds the Chapter 13 limits may need to contemplate Chapter 11 in order to manage and discharge their debt.""
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