When Is It Appropriate To Declare Bankruptcy

Filing for bankruptcy involves a series of legal steps. Failure to comply with these steps can lead to your case being dismissed.

Bankruptcy is an option if you are overwhelmed by debts. 

Declaring bankruptcy may be the right choice if you face foreclosure, have large debts, are in default on your mortgage payments, or are being harassed and billed. It might not be.

Although bankruptcy can reduce or eliminate debts in certain cases, it can also save your home from being repossessed by creditors. However, there are serious consequences that could result, including long-term credit scores and damage. 

This can affect your ability to borrow in the future, increase the rate you pay for insurance and make it more difficult to find a job.

Different types of bankruptcy

Federal courts handle bankruptcy cases. The federal law distinguishes six types of bankruptcy. Individuals use Chapter 7 and Chapter 13 most often, named after the sections in the federal bankruptcy code. 

Chapter 11 bankruptcy, which is often in the headlines, is primarily for businesses.

The most common type of bankruptcy is Chapter 7. It’s also known as straight bankruptcy or liquidation. The court may appoint a trustee to sell some of your assets and use the proceeds to repay creditors partially. 

After that, your debts will be considered discharged. Certain types of property are exempted from liquidation. These include your car, clothing, household goods, tools of your trade, pensions, and a portion of any equity you may have in your home. 

When you file bankruptcy, you should declare the exempt property that you are claiming.

Chapter 13 bankruptcy is a court-approved plan that allows you to repay all or a portion of your debts over three to five-year periods. You may also be able to discharge some of your debts. 

Chapter 13 bankruptcy does not require you to liquidate your assets. This allows you to keep your home as long as you make the agreed-upon monthly payments.

Some types of debts are not generally able to be discharged by bankruptcy. These include student loans, child support, alimony, tax obligations, and certain tax obligations.

The Bankruptcy Filing Procedure

Individuals must attend a credit counseling session before filing bankruptcy. They also need to obtain a certificate that will allow them to file their bankruptcy petition. 

Counselors should assess your situation and offer advice about budgeting and debt management. They also discuss options for bankruptcy. The federal bankruptcy court nearest you can provide the information. You can also visit its website to find the names and contact information for credit counseling agencies approved by the government.

Filing for bankruptcy requires you to file a bankruptcy petition along with financial statements that show your income, debts, and assets. A means test is required. This determines if your income is sufficient to be eligible for Chapter 7. 

You must submit a means test form. This determines if your income is low enough for you to qualify for Chapter 7. A filing fee will be required, but it can sometimes be waived if it’s not necessary.

The bankruptcy court can provide the forms that you require. You can also get the forms from the bankruptcy court if you hire a bankruptcy lawyer.

After you file, the bankruptcy trustee will organize a meeting with creditors. This is also known as a “341 meeting” for the specific section of the bankruptcy code. This meeting is for creditors to discuss your financial situation and your plans to repay them, if applicable.

Based on the information provided, a bankruptcy judge will decide your case. A bankruptcy judge will decide your case based on the information you provided. Unless your case involves a lot of complexity, you won’t be required to appear before the judge.

You must complete a debtor education class after you file for bankruptcy. This will give you advice on money management and budgeting. You will need to get a certificate proving that you participated in the course. 

A list of approved debtor education providers can be obtained from either the bankruptcy court or the Justice Department.

If the court rules in your favor, Chapter 7 will discharge your debts. Chapter 13 will approve a repayment plan. The creditor cannot collect the debt from you after it is discharged.

Bankruptcy: The Consequences

Each type of individual bankruptcy has its own set of negative consequences. A Chapter 7 bankruptcy will stay on your credit report for ten years, while a Chapter 13 bankruptcy generally stays for seven years.

Experian, one of the three largest national credit bureaus, states that declaring bankruptcy can have the biggest single impact on your credit scores. It could also make it appear you are a low risk to potential employers and other lenders.

You should also be aware that bankruptcy limits the number of times you can get your debts discharged. You must wait eight years if your Chapter 7 bankruptcy discharged debts.

Are Lawyers Required?

Individuals can file bankruptcy without the assistance of an attorney, unlike corporations and partnerships. This is called “pro se” filing. It is generally not a good idea to file for bankruptcy without an experienced attorney.

Alternatives to Bankruptcy

Although bankruptcy is often the best option to escape from financial ruin, it is not the only one. You don’t have to go bankrupt to reduce your debts.

Sometimes, it can work in your favor to negotiate with creditors without having to involve the courts. Instead of risking nothing, a creditor may agree to a repayment plan that reduces or spreads the payments over a longer time.

It’s worth speaking to your loan servicer if you have difficulty paying your mortgage. Forbearance allows you to stop paying your mortgage payments for a specific time or to set up a repayment plan that will make smaller monthly payments over a longer time. 

A loan modification is another option. This will modify the terms of your loan, such as lowering the interest rate and make it easier to repay. Be wary of unsolicited offers by companies promising to keep your house from being foreclosed. These companies may not be legitimate.

You may be eligible to receive an offer in compromise if you owe the IRS money. This allows you to settle with them for a lesser amount than what you owe. For taxpayers who cannot pay all their taxes at once, the IRS may offer monthly payment plans.

When is it time to file for bankruptcy?

As a result of large medical bills or unexpected expenses, bankruptcy law is designed to assist people who have often taken on unmanageable amounts of debt. This allows them to make a fresh start. It is not an easy process, and it doesn’t always result in a happy ending.

Before filing for bankruptcy, make sure you explore all options and prepare for the possible negative consequences. If bankruptcy is the only option, as hundreds of thousands of Americans decide each year, it will not permanently blot your record. 

You can rebuild your credit by using credit responsibly in the future and making payments on time.

 

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