What You Should Know Before Filing For Bankruptcy
Here’s how personal bankruptcy works if you’re thinking about it.
You may be considering bankruptcy if your bills have gotten overwhelming or you are facing foreclosure on your house. While bankruptcy may be the only option for some, it comes with major repercussions that should be considered before making any choices. For example, depending on the form of bankruptcy, bankruptcy will be on your credit record for seven or ten years. It may be difficult to get a credit card, vehicle loan, or mortgage in the future as a result of this. It might also result in increased insurance premiums, as well as a reduction in your capacity to find work or rent an apartment. This article outlines the process of bankruptcy and suggests various alternatives.
Takeaways
- Bankruptcy may have a significant negative impact on your credit score and should only be used as a last option.
- As an alternative, you may be able to work out a payment plan or other reasonable agreement with your creditors.
- You have two fundamental alternatives if you decide to file for bankruptcy: Chapter 7 and Chapter 13.
- In a Chapter 7 bankruptcy, many of your assets will be sold to pay your creditors. You maintain your assets in a Chapter 13 bankruptcy, but you must return your obligations over a fixed length of time.
Before Filing for Bankruptcy, Here’s What You Should Do
People who are deeply in debt and see no means to pay their debts should consider bankruptcy as a last option. There are alternatives to bankruptcy that are worth considering before filing. They are less expensive than bankruptcy and are less likely to harm your credit record.
Find out whether your creditors are prepared to compromise, for example. Some creditors may agree to accept decreased payments over a longer period of time rather than wait for a bankruptcy settlement and risk obtaining nothing at all.
If you have a house mortgage, contact your loan servicer to see what choices you may have. Some lenders provide forbearance (deferring payments for a certain period of time), repayment plans (smaller payments spread out over a longer period of time), or loan modification programs (which might, for example, lower your interest rate for the remainder of the loan).
Even the Internal Revenue Service is often prepared to work out an agreement. If you owe taxes, you may be eligible for an offer in compromise, in which the IRS agrees to accept a reduced sum in exchange for your payment. Payment plans are also available from the IRS, enabling qualified taxpayers to settle their debts over time.
How to Initiate a Bankruptcy Case
If you’ve chosen to file for bankruptcy, the first thing you should do is speak with an attorney. While it is possible to file without one, the Administrative Office of the United States Court advises that “getting the opinion of a knowledgeable attorney is highly encouraged since bankruptcy has long-term financial and legal consequences.” (While certain laws change from state to state, bankruptcy is controlled by federal law and cases are handled by federal bankruptcy courts.)
You must first attend a counseling session with a credit counseling institution that has been authorized by the Department of Justice’s U.S. Trustee Program before filing. The counselor should assess your specific financial circumstances, explain bankruptcy choices, and assist you in developing a budget plan. According to the Federal Trade Commission, counseling is free if you can’t afford it; otherwise, it should cost about $50.
If you still want to go forward, your lawyer can help you figure out which sort of bankruptcy is best for you.
Personal Bankruptcy Types
There are two typical types of bankruptcy for people, as opposed to businesses: Chapter 7 and Chapter 13. Here’s a quick rundown of how each one works:
7th Chapter In this sort of bankruptcy, your assets are liquidated in order to pay your creditors. Some assets are excluded, meaning you may retain them, such as part of the equity in your house and car, personal belongings, clothes, equipment required for your job, pensions, Social Security, and any other public benefits.
Your non-exempt assets, on the other hand, will be auctioned by a trustee appointed by the bankruptcy court, with the money going to your creditors. Property (other than your principal house), recreational vehicles, boats, a second car or truck, collectibles or other expensive objects, bank accounts, and investment accounts are all examples of non-exempt assets.
Most of your debts will be forgiven at the conclusion of the procedure, and you will no longer be obligated to repay them. Certain obligations, such as school loans, child support, and taxes, however, are not dischargeable. Individuals with a low income and limited assets are more likely to choose Chapter 7. As mentioned below, your eligibility for it is also subject to a means test.
13th Chapter You are permitted to keep your assets in this sort of bankruptcy, but you must agree to repay your obligations over a three to five-year period. The trustee collects and distributes your payments to creditors. People who wish to maintain their non-exempt property or purchase time against foreclosures or property seizures usually choose Chapter 13 bankruptcy.
The Chapter 7 Means Test
It is not up to you to decide whether to apply for Chapter 7 or Chapter 13. A means test is also used by the courts to assess if you are eligible for Chapter 7. The means test compares your typical monthly income to the median income for a family of your size in your state; if you earn less than the median, you should qualify for Chapter 7.
Even if your income is greater than the median, after deducting certain permitted costs, you may be qualified. However, if the math reveals that you’d have enough discretionary income to start repaying your debts rather than having the slate wiped clean, the court could rule that Chapter 13 is your sole alternative. You will be needed to complete this 122A-2 Form in order to establish your eligibility.
Make a list of your debts.
When you file for bankruptcy, you will be required to provide the court with a list of all your debts. Your debts are divided into two groups:
- Debts that are secured. These are loans in which the creditor has a security interest in the property used as collateral when the loan was taken out. Mortgages and auto loans are the two most frequent forms of secured loans, using your house or car as collateral.
- Unsecured debts: These are debts that are not backed up by property or other assets. Credit card debt, medical costs, and personal unsecured loans are all examples.
Secured debt is given greater priority by the bankruptcy court since failure to pay it might result in the creditor claiming the collateral property.
The court appoints a trustee when all of the necessary paperwork has been presented to the court. The trustee’s role is to ensure that your secured debt is repaid over a certain period of time. The court will then order an automatic stay, preventing creditors from taking assets via property seizure or foreclosure.
Getting Rid of Your Debts
You are liberated of your obligation to repay the stated debts when the bankruptcy court approves a discharge. As a result, creditors no longer have a legal claim to the debts, and they are unable to continue collection efforts, take legal action, or even engage with you in any manner.
Your creditors will get notification from the court that your obligations have been dismissed. A copy will also be given to your lawyer and the Department of Justice’s U.S. Trustee Program. Any creditor who tries to collect a debt after obtaining a discharge notification may be penalized.
The discharge for a Chapter 7 bankruptcy is normally awarded four to six months after the bankruptcy petition is filed. After the payment plan is completed, generally three to five years after the bankruptcy filing, the discharge is granted under Chapter 13 bankruptcy.
Once the court has dismissed your obligations, your creditors are no longer allowed to try to collect them or take further legal action against you.
Getting Your Credit Back on Track After Filing for Bankruptcy
As previously stated, bankruptcy will appear on your credit record for seven years (in the event of Chapter 13) or ten years (in the case of Chapter 7). (in the case of Chapter 7). It may be difficult to receive more credit, such as a bank loan or a traditional credit card, as a result of this. However, the impact of bankruptcy on your credit score will fade with time, and if you demonstrate that you’re responsible with credit, your score will progressively recover.
A secured credit card, for example, allows you to make a deposit with the issuing bank, which subsequently becomes your credit line. You may start building a new credit history by using the card responsibly and paying your bills on time. You may be qualified for a normal, non-secured credit card after a period of on-time payments.
Rebuilding your credit and regaining control of your finances might take time. But bankruptcy isn’t the end of the world if you don’t have any other options.
