What You Should Know Before Filing For Bankruptcy
Here’s how bankruptcy works if you’re thinking about it.
You may be considering bankruptcy if your obligations have grown overwhelming or you face foreclosure on your house. While bankruptcy may be the only option for some, it comes with significant implications that should be considered before making any choices.
For example, bankruptcy will be on your credit record for seven or ten years, depending on the kind of bankruptcy. It may be difficult to acquire a credit card, auto loan, or mortgage in the future due to this.
It may also result in increased insurance premiums, as well as a reduction in your capacity to find work or rent an apartment. This article discusses the process of bankruptcy and suggests various alternatives.
Before Filing for Bankruptcy, Here’s What You Should Do
People who are deeply in debt and see no means to pay their obligations should consider bankruptcy as a last option. However, 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 bargain, for example. Some creditors may agree to accept lower payments over a longer period rather than wait for a bankruptcy settlement and risk receiving nothing at all.
If you have a house mortgage, contact your loan servicer to see what alternatives you may have. For example, some lenders provide forbearance (deferring payments for a certain period), repayment plans (smaller payments spread out over a longer 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 ready to work out an agreement. For example, if you owe taxes, you may be eligible for an offer in compromise, in which the IRS agrees to accept a lesser 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 counsel of a competent attorney is highly advised since bankruptcy has long-term financial and legal consequences.”
(While certain regulations vary from state to state, bankruptcy is regulated by federal law and cases are handled by federal bankruptcy courts.)
You must first attend a counseling session with a credit counseling agency that has been recognized by the Department of Justice’s U.S. Trustee Program before filing.
The counselor should assess your particular financial position, explain bankruptcy options, 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 kind of bankruptcy is best for you.
Personal Bankruptcy Types
There are two main types of bankruptcy for people, as opposed to businesses: Chapter 7 and Chapter 13. Here’s a quick rundown of how each one works:
Chapter 7. Chapter 7 bankruptcy is a form of bankruptcy in which you liquidate your assets to pay your creditors. Some assets are excluded, meaning you may retain them, such as a portion of the equity in your house and car, personal goods, 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 profits going to your creditors. Property (other than your main home), recreational vehicles, boats, a second car or truck, collectibles or other expensive things, bank accounts, and investment accounts are all examples of non-exempt assets.
Most of your debts will be dismissed after the procedure, and you will no longer be obligated to repay them. However, certain obligations, such as school loans, child support, and taxes, are not dischargeable. As a result, individuals with a low income and little assets are more likely to choose Chapter 7. As described below, your eligibility for it is also subject to a means test.
Chapter 13. You are permitted to keep your assets in this form 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 retain their non-exempt property or purchase time against foreclosures or property seizures usually choose Chapter 13 bankruptcy. 5
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, you may be qualified after deducting certainly allowed expenditures. However, if the math indicates that you’d have enough discretionary income to start repaying your debts rather than having the slate wiped clean, the court may rule that Chapter 13 is your sole choice. You will be needed to complete this 122A-2 Form to establish your eligibility. 6
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 vehicle loans are the two most popular kinds of secured loans, using your house or car as collateral.
- Unsecured debts. Debts that are not secured by property or other security are referred to as unsecured debts. Credit card debt, medical expenses, and personal unsecured loans are all examples.
The bankruptcy court prioritizes secured debt since failure to pay it may result in the creditor claiming the collateral property.
The court appoints a trustee once all of the necessary paperwork has been submitted to the court. The trustee must ensure that your secured debt is repaid over a certain period. 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 freed of your obligation to repay the specified debts when the bankruptcy court grants 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 contact you in any manner. 7
Your creditors will get notification from the court that your obligations have been dismissed. A copy will also be provided 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. 7
The discharge for a Chapter 7 bankruptcy is typically granted four to six months after the bankruptcy petition is filed. After completing the payment plan, typically three to five years after the bankruptcy filing, the discharge is granted under Chapter 13 bankruptcy. 7
Getting Your Credit Back on Track After 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 acquire more credit, such as a bank loan or a traditional credit card, due to 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 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 standard, non-secured credit card after a period of on-time payments.
Rebuilding your credit and regaining control of your finances may take time. But, if you don’t have any other options, bankruptcy isn’t the end of the world.
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