Bankruptcy used to be the simplest way out of a tough situation. No matter whom it was and how much debt they had, if the judge approved a bankruptcy, the consumer would be free of all of their obligations to repay any debts. Of course, this wouldn't come completely free - liquidating all properties and assets with a seven year blemish on the credit report. But to get rid of a debt ranging from $50,000 to multi-millions, most consumers wouldn't think twice.
That is, until they changed the requirements.
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Today, there are two types of bankruptcies for the average consumers. Chapter 7, the one we all know and all, and Chapter 13. This new bankruptcy was enforced during the time our recession was at its worst (about two years ago) because of all the bankruptcy applications across the nation. Our judges were completely swarmed in bankruptcy pleads while banks were losing too much money due to the amount of foreclosures and debt pardons they were issuing.
The law changed the standard of bankruptcy and made Chapter 13 the default one. Today, to be approved for Chapter 7, consumers must take a means test which compares their family's income to the median income in their state for a family of the same size. Then, there's a calculation of disposable income and unsecured debts to see if their creditors can be repaid at all. If not, Chapter 7 would be the appropriate solution. But if consumers do have the necessary means, then they will get a Chapter 13 bankruptcy. They will not be forced to liquidize their assets, but they will be making a structured repayment plan according to how the court arranges it. This type of bankruptcy will also leave a seven year blemish on the credit report and will make applying for credit virtually impossible.
Although bankruptcy used to actually pardon consumers and help them get out of debt, it seems as though it is now just another credit counseling or debt management program. And not only does it cost money to hire a bankruptcy attorney (which doesn't guarantee approval by the judge), but the damage to your credit report is many times worse than what you would get from credit counseling programs.
Debt negotiation or debt settlement programs do not show on consumer's credit reports and are able to relieve consumers within one to three years while paying only fractions of their total debts. This gives consumers another few years to rebuild their credit scores and get back on their feet and never have to worry about long term damage to their credit worthiness.
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