Bankruptcy is a scary prospect for many consumers. However, it is not necessarily as bad as you might imagine. Its purpose is not to ruin your financial prospects forever. Rather, it is to help you rehabilitate your financial situation.
As a consumer, there are usually two types of bankruptcy available to you: Chapter 13 and Chapter 7. The former helps you to repay a portion of what you owe by reorganizing your debt. The latter eliminates at least a portion of your debt, and sometimes all of it, but may require you to sell some assets.
Part of the reason bankruptcy may seem intimidating is that the legal terminology associated with it is unfamiliar to you. Understanding common bankruptcy terms may give you a better idea of what to expect from the process.
This is the ultimate goal of the bankruptcy process. Discharge of your debts means that the bankruptcy process has completed and your creditors have received whatever payment the court has deemed appropriate.
Discharge of a Chapter 13 bankruptcy occurs after a repayment plan that lasts three to five years. Chapter 7 bankruptcy discharge often comes after selling off some of your assets to pay your debts in a process called liquidation.
Regardless of whether you file Chapter 7 or Chapter 13 bankruptcy, the court will appoint a responsible person to oversee the process. This person is the bankruptcy trustee. His or her responsibilities include distributing proceeds from Chapter 7 liquidation or payments from Chapter 13 reorganization to your creditors.
- Exempt property
Chapter 7 bankruptcy involves selling off, or liquidating, some of your assets. However, it is illegal to deprive you of everything you own through liquidation. Some types of property are exempt, meaning that they are not subject to liquidation. Exempt property may include equity in your primary residence or equipment that you need to perform your job.
While bankruptcy is not necessarily the frightening prospect that many consumers imagine, it is important to make sure that you go about it the right way. If you make a mistake while filing, it could end up costing you significantly.