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How will bankruptcy affect my financial life, credit availability?

No matter what a debtor's profile in terms of specific types of debt, one of the foremost concerns people have about bankruptcy is how it will impact their credit score and their financial life in general. The answer depends on factors related to the bankruptcy filing itself, as well as how the debtor handles his or her finances after the bankruptcy process is completed.

Exactly how bankruptcy will impact a debtor's financial life depends, first of all, on the type of bankruptcy for which he or she files. Chapter 7 and Chapter 13 bankruptcy proceed differently with respect to paying off creditors, and this means different financial outcomes for debtors in each type of bankruptcy.

Chapter 7 bankruptcy, which involves liquidation of assets, could result in a debtor having to give up his or her car, home, or certain other assets which aren't exempted from liquidation, and this can impact a debtor after bankruptcy when good credit is not available. Chapter 13 involves a repayment plan rather than liquidation of assets, so assets to not have to be given up in the process, but having to make regular payments to a bankruptcy court means less money to put toward savings, vacations, new purchases, and so on, until the repayment plan is completed. This may have an impact for some time after the bankruptcy as well, depending on the circumstances.

The type of bankruptcy filed could also impact a debtor's financial life post-bankruptcy because of differences in the way debts are discharged. Discharge is one of the primary benefits of bankruptcy, but the right to discharge is not absolute and some types of debts may not be discharge. Chapter 7 and Chapter 13 handle discharge slightly differently. In Chapter 13, for example, discharge generally releases a debtor from all debts provided for by the repayment plan or disallowed, though there are exceptions for certain debts and discharge is dependent on the debtor fulfilling his or her obligations in the process. The extent to which discharge is granted in either type of bankruptcy certainly impacts a debtor's financial life post bankruptcy.

In our next post, we'll continue this discussion, looking specifically at how bankruptcy impacts a debtor's credit health.

Sources:

Uscourts.gov, "Chapter 13--Bankruptcy Basics," Accessed September 13, 2016.

Uscourts.gov, "Chapter 7--Bankruptcy Basics," Accessed September 13, 2016.

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