What Is The Best Time To File for Bankruptcy?

Contrary to popular belief, declaring bankruptcy isn’t the end of the world. This could be the opportunity to make the start you have been looking for. Bankruptcy laws were designed to give people a second chance and not penalize them.

This doesn’t mean you should declare bankruptcy at any sign of financial difficulty. Bankruptcy can have both immediate and long-term consequences and should not be considered as an option. When is the best time for bankruptcy to be declared?

Be aware of your situation before you file

What is the best time to declare bankruptcy? This is the question most people who are in financial difficulty ask. You should consider other options before you decide to take this route. 

  • Credit counselling
  • You were creating a payment plan or settling your debt with your creditor. 
  • Keeping to a budget is another option.

If none of these options seems viable, bankruptcy could be a way to get a fresh start.

What is Bankruptcy? How does it affect you?

Bankruptcy allows you to pay off some of your debts if they are not repayable. Two ways are common to declare bankruptcy:

  • You declare bankruptcy.
  • The court will file a bankruptcy petition on behalf of your creditors.

The most popular types of bankruptcy are Chapter 7 bankruptcy and Chapter 13.

Bankruptcy under Chapter 7

Chapter 7 bankruptcy is also known as “straight bankruptcy” or “liquidation”. It allows a debtor to pay off its obligations through the sale of non-exempt assets. After that, they are free from any dischargeable debts.

To qualify for Chapter 7 bankruptcy, you must satisfy specific qualifying criteria. Here are some situations where you may not be eligible for Chapter 7.

  • If your income is too high, as determined by the “means test”, you may file Chapter 13 bankruptcy 
  • You can repay your loan.
  • You have dismissed a bankruptcy matter within the past 180 days.
  • You have filed for bankruptcy already, and the deadline to file a new case has not expired. 
  • You tried to deceive creditors.

BankruptcyHQ’s Chapter 7 bankruptcy section provides a wealth of information about Chapter 7 bankruptcy.

Bankruptcy under Chapter 13

Chapter 13 bankruptcy will require you to make a three to five-year repayment plan to repay creditors. This is a standard option if your income exceeds Chapter 7 bankruptcy income limits.

You must prove that you meet the requirements before you can file Chapter 13. These are just a few of the criteria:

  • You are not a corporation
  • You did credit counselling 
  • I have not had a Chapter 13 case dismissed within the last 180 days
  • You have not filed a Chapter 13 within the past two years

BankruptcyHQ’s Chapter 13 bankruptcy section explains whether you are eligible for Chapter 13 bankruptcy.

Things to consider before filing for bankruptcy

Before declaring bankruptcy, there are some things you need to consider. Here are some:

All debts may not be forgiven.

Be aware that bankruptcy filings will not erase all your debts.

Some obligations that cannot be cancelled include: 

  • student loans
  • child support
  • alimony
  • court fines or penalties.

All credit card and loan debt and loans and lease or contract obligations are eligible for discharge.

Your credit score will be affected if you file for bankruptcy

In return for your debt being discharged, filing bankruptcy signals to others that you are a credit risk. This will reflect in your credit score. It may prove challenging to obtain a loan, mortgage or credit card after bankruptcy filings.

Remember that a Chapter 7 bankruptcy will remain on your record for ten years.

It will be visible on your credit report for seven years if you file Chapter 13 bankruptcy. It is then deleted.

You may have to pay your co-signers

If you are unable to make your payment, co-signers will promise to pay it. If you file Chapter 7, your creditors can pursue the cosigner even if your bankruptcy case is successful.

Your creditors can’t pursue your cosigner under Chapter 13 if you keep your monthly payments in line with your agreement.

Bankruptcy during a Pandemic

Due to the changes in court hours, it may be difficult to file for bankruptcy after a national disaster or pandemic. Before you file, make sure that your local bankruptcy court is available and accepting cases. It is possible to anticipate delays in the processing of your case.

The Federal Government might get involved

The federal government can, in exceptional circumstances, pass legislation that will affect your bankruptcy case during a pandemic. The federal government approved a stimulus program in response to the COVID-19 pandemic.

As part of the stimulus package, several temporary modifications were made to bankruptcy law. These are just a few of the changes that were made:

  • The debt limit for a bankruptcy filing under the Small Business Reorganization Act was $2,725,625. Under the stimulus package, the debt ceiling was increased to $7.5million for a single year.
  • The law also changed the definition of income for Chapter 7 and Chapter 13 bankruptcy filers. For bankruptcy purposes, payments made by the federal government to COVID-19 will not be considered income.
  • Federal student loan holders may defer payments for up to six months but will not be penalised until September 30, 2020.
  • Suppose they are currently on a repayment program and have filed Chapter 13 bankruptcy. In that case, they may be eligible to make modifications if they can prove “substantial financial difficulty” due to the epidemic. These changes include a seven-year payment extension.

Consult an attorney before you file for bankruptcy

It is essential to have all the information necessary to file bankruptcy. This is especially true if you are considering it. A local bankruptcy attorney is an excellent way to protect your rights.

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