What is Bankruptcy? What are the Different Types and What Are The Consequences?
Bankruptcy in the United States is a legal process that is governed by the bankruptcy courts. It assists individuals and businesses in repaying some or all of their debts.
Although bankruptcy may be able to help you pay off your debts, it can also harm your credit score. Bankruptcy can stay on your credit report for 7-10 years. This will limit your ability to get credit cards or low-interest loans.
The basics of Bankruptcy
Bankruptcy can be difficult for the average person to navigate. A bankruptcy professional can help ensure that your bankruptcy process proceeds smoothly and that you comply with all applicable bankruptcy laws and regulations.
You must meet certain requirements before you can file for bankruptcy. The government-approved credit counselor must be able to provide credit counseling. Counselors will help you assess your financial situation and discuss bankruptcy options. They also can help you create a budget plan.
You will need to choose between Chapter 7 or Chapter 13 if you want to file bankruptcy. You can get rid of unsecured debts (such as credit cards), stop foreclosures or repossessions, stop wage garnishments and utility shut-offs, stop debt collection activities and stop foreclosures. Both types require that you pay your attorney fees and court costs. Both types of bankruptcy, however, relieve debt in different ways.
Bankruptcy under Chapter 7
Most people think of Chapter 7 bankruptcy when they consider filing for bankruptcy. This is also known as “straight” bankruptcy.
A federal court trustee will be appointed to oversee the sale. This includes cars, basic household furniture, and work-related tools. Your debts will be settled with the proceeds of the sale. The bankruptcy discharge will erase any remaining debts. Some types of debts cannot be discharged under Chapter 7 bankruptcy. The court may impose additional fees such as alimony or child support.
A Chapter 7 bankruptcy to bean has serious consequences. You won’t file bankruptcy under the Chapter 7 chapter again for eight years if you are in debt. You will almost certainly lose all your property, and the negative bankruptcy information will remain on your credit report for ten years.
Bankruptcy under Chapter 13
The Chapter 13 bankruptcy process is a bit different. You can retain your property in exchange for your debt to be paid off in full or in part. The bankruptcy court will negotiate a three- to a five-year repayment plan with your attorney. Depending on the terms of the agreement, you may agree to repay some or all of your debt during that period. After you have completed the agreed-upon repayment plan, your debt will be dismissed.
Although any type of bankruptcy can be bad for credit, Chapter 13 bankruptcy might be better. If you pay off a portion (or all) of your debt, you may be allowed to keep some assets. You can file again under Chapter 13 bankruptcy within two years of filing.
Definitions of terms for bankruptcy
There will be certain terms and legal terminology that are specific to bankruptcy proceedings. These terms will come up throughout the process. These are some of the most important and frequent terms:
- Bankruptcy trustee: The bankruptcy trustees are appointed trustees by the bankruptcy court to represent creditors. The trustee reviews the petition and liquidates any assets that are not Chapter 7-filed. After this, they distribute the money to creditors. The trustee oversees the debtor’s repayment plan and collects payment from him. In Chapter 13 cases, they distribute the money to creditors.
- Credit counseling: You must consult with a non-profit budget and credit counseling agency before you can file bankruptcy. You must complete a course on personal financial management before your bankruptcy can be dismissed. In certain situations, both of these criteria can be waived.
- Discharged bankruptcy: After all the necessary processes are completed, bankruptcy can be deemed discharged. After your assets are liquidated and Chapter 7 creditors have been paid, “discharged bankruptcy” is called. This happens after your repayment plan has been completed.
- Excluded property: Although both types of bankruptcy can force you to sell assets to repay creditors, some categories of property might be exempt. The state laws determine what debtors can keep. However, equity in a primary home and personal cars is often excluded.
- Lien: A legal proceeding that allows a creditor or other party to seize, keep, and sell a debtor’s real property to secure or repay a debt.
- Liquidation: A bankrupt can liquidate non-exempt property. Asset sales convert assets into liquid cash that is then distributed to creditors.
- Means test: Individuals filing Chapter 7 bankruptcy must prove that they don’t have sufficient financial resources to pay their obligations, according to the Bankruptcy Code. This provision was created to protect the bankruptcy law from abuse. The test takes into account income, assets, debt, and expenditures. A Chapter 7 bankruptcy filing may be dismissed or transferred to Chapter 13 bankruptcy if a debtor fails to pass the means test.
- Reaffirmed account: You may agree to continue paying debts that you would otherwise have dismissed if you file for Chapter 7. A debtor may keep a piece of collateral such as a vehicle by reaffirming the account and promising to pay the bill.
- Secured debt: This refers to debt that is secured with reclaimable assets. For example, your mortgage is secured by your home, but an auto loan is secured with the vehicle. Creditors have the right to take the collateral if they default on a secured obligation.
- Unsecured debt: (such as credit cards) is one for which the creditor does not have any physical security.
Although bankruptcy can help you eliminate a lot of debt, it will not remove all your unforgivable debt. These debts cannot be discharged through bankruptcy:
- The majority of student loan debt (although certain members of Congress are trying to change this).
- Alimony imposed by a court.
- A court has imposed child support.
- Reaffirmation of the debt.
- A federal tax lien is a claim against the United States government for money owed to it.
- The government can impose fines.
- Courts may impose fines or penalties.
Perhaps the most common consequence of bankruptcy is the loss of property. In certain circumstances, bankruptcy can result in the loss or destruction of real property, cars, jewelry, antique furniture, or other valuables. Both types of bankruptcy may require you to sell assets to repay creditors.
The financial consequences of bankruptcy can have an impact on other people. For example, if your parents signed a car loan agreement for you, they could be held responsible for at least a portion of the debt.
Last but not least, bankruptcy can harm your credit score. Negative information such as bankruptcy is recorded on your credit reports and can influence the perception of prospective lenders. Creditors may not be able to approve you for credit if you have a bankruptcy record.
You may have bad credit information about bankruptcy that stays on your credit report for as long as ten years, depending on which type of bankruptcy you file. Accounts that have been canceled will see their status change to reflect this fact. This information will also appear on your credit report. Credit scores can be affected by negative credit information.
How to get a loan or credit card after bankruptcy
Once your bankruptcy has been cleared, it may be harder to obtain credit in the future. Lenders might be reluctant to extend credit to you, so you might be asked to agree to a lower interest rate or other terms.
It is crucial to repair your credit as soon as possible and make sure you pay all your bills on time. Avoid any bad habits that contributed to your financial problems.
After bankruptcy, how to get a mortgage
It is possible to lose your unsecured credit and make it more difficult to obtain a mortgage. Lenders may reject your mortgage application. Those that accept it might offer you a higher interest rate or cost. You may be required to pay a higher down payment or pay more for closing fees.
It may be better to keep your mortgage in place during bankruptcy proceedings than to give up your home and try to get a new mortgage. If you don’t have other bills, you could keep your home, pay off the existing mortgage and continue to live in your current house.
Alternatives to Bankruptcy
There are many options available to you when dealing with overwhelming debt. These options can affect your credit but are not as severe as bankruptcy. They may also allow you to keep your property instead of having it liquidated in bankruptcy.
Here are some options for bankruptcy:
- Ask for help from a credit counselor or a plan to manage your debts that have been approved by the government. Counselors may be able to work with creditors to create a reasonable repayment plan.
- To consolidate your debts, you can take out a loan. These loans can combine several high-interest, costly debts into one, lower-interest loan. You may be able to reduce your monthly payment and make your debt easier by consolidating debt.
- Ask your creditors to negotiate a lower payback rate. You and your creditors don’t want to default on your debt. They may be willing to work with you to find a more manageable repayment schedule. You will harm your credit rating if you settle your debt.
Failure to follow the terms of your debt repayment agreement may result in a negative effect on credit. But bankruptcy can still harm your credit more than credit counseling, debt consolidation, to be, or credit negotiation.
One last thought on debt relief
You could have negative credit effects if you don’t repay a loan on time. Some debt relief methods have longer-lasting and more severe consequences than others. You should research your options, seek the guidance of a qualified credit counselor and fully understand the impact of your choices on your financial health.
No matter what type of debt relief you choose, you can improve your credit score immediately by following simple, sensible credit-building steps such as:
- Paying your bills on time.
- Avoid getting into more debt.
- Keep an eye on credit reports.
- Setting a personal budget is important and sticking to it.
- Use credit in small amounts (e.g., a secured card). Pay off debt as soon as you can.