The Chapter 7 financial discharge releases individual debtors from personal liability for most debts and prevents creditors who are owed from taking any collection actions against the debtor. There are exceptions, but individual debtors receive a discharge in more than 90 percent of Chapter 7 cases. A Chapter 13 bankruptcy is a liquidation of debts as opposed to a discharge. It is an opportunity to regroup rather than be completely dismissed from owing.
From the Creditor's Point of View
When creditors get bankruptcy notices from their debtors, some assume they have no rights or alternatives. This is not entirely true. Creditors can share in distributions from the bankrupt person's estate according to the priority of their claims. They can attend the hearing concerning the debtor's plans, liquidate the debtor's non-exempt assets and claim payments from the assets. A creditor can also challenge an individual debtor's right to a discharge of the creditor's debt.
Impact
A bankruptcy discharge (Chapter 7) will not erase your credit history. Bankruptcies can be reported for 10 years after discharge. The amount outstanding for each discharged account should be shown as zero, but the history of delinquencies will still show up on the report. A negative report does not mean permanent doom, but its intended consequences are that people learn to save and use credit wisely in the future, if at all.
Chapter 13 insolvency shows a willingness to pay off existing debt under new terms. It is the equivalent of a Chapter 11 for a corporation, in which there is some income and incentive to repay, but where financial management may have gotten out of control and needs to be reigned in.
A credit report does not automatically equal creditworthiness, and making payments on time is no guarantee of being able to obtain more credit, especially if you're already in debt over your head.
Significance
The one-sided nature of credit card companies is that they want their cardholders to remain in debt. Minimum payments are based on calculations engineered to keep the debt from being retired in less than 25 and up to 40 years, and penalties and late fees are a virtual cash cow for card issuers. The point is to make sure the consumer who uses a credit card never gets out of debt. In cases of out-of-control credit card debt, a Chapter 7 discharge is the best way to go, as its end result makes the debtor more credit-worthy within two years. In a Chapter 13 bankruptcy, the old debt remains, and the credit report showing "slow" credit doesn't necessarily make a bankruptcy filer better off in the long run.
As always, an attorney should be consulted on all matters pertaining to the best course to take before filing a bankruptcy.
Misconceptions
Some common misconceptions: Chapter 13 plans require debt repayment in full; people who file bankruptcy can't get credit for 10 years; you lose everything you own in bankruptcy; bankruptcy is a sign of personal or moral failure; there is a minimum amount of debt required to file bankruptcy; married couples must file together. Wrong. All wrong. A Chapter 13 repayment plan depends on liquid assets, such as disposable income and the value of non-exempt assets. The truth is that while a bankruptcy can be reported for 10 years, most people who file a Chapter 7 get bombarded with credit card and loan offers almost immediately after discharge in "fresh start" programs. The terms are not as good, but the offers are there. Also, some debtors who file a Chapter 13 can still borrow during the bankruptcy process.
Considerations
The best way to handle life after bankruptcy of any kind is to take a fresh approach to the future without focusing on past credit history, but on resources as they currently stand. Join a credit union; put the money formerly spent on monthly payments into a savings account; switch to bag lunches instead of eating out; open a retirement plan savings account or increase the amount of your contribution; check your credit report to make sure the discharged debts are shown as zero; use only one credit card, and pay it off in full every month. In short: Spend wisely and save. Lastly, avoid credit "repair" companies; they cannot do anything for you that you cannot do for yourself.
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