What is bankruptcy?

If your debt has grown larger than your ability to pay it down now or in the future, you may want to consider declaring bankruptcy to discharge it.

 

Be aware, however, that bankruptcy is generally a last resort option. You should consider all other options, including debt management, debt settlement, debt consolidation and credit counseling, before considering bankruptcy. You should also consult with a bankruptcy attorney as soon as you start contemplating bankruptcy as a possible solution to your problem with debt.

The benefit of bankruptcy is, when it is over, you no longer owe any or most of the debt you owed before. However, the negative consequences of having declared bankruptcy are far-reaching and could stay with you for a long time. Therefore, it is important to weigh the advantages and disadvantages carefully for your specific circumstances and needs before you ever commit to filing for bankruptcy.

Benefits of Bankruptcy

In many ways, bankruptcy gives you an opportunity to start anew with a clean financial slate. Filing bankruptcy halts the process of debt collections, from phone calls to wage garnishments and lawsuits. Within six months after your debts are discharged in bankruptcy, certain elements of your personal finances will start to improve. However, keep in mind that it can take up to seven years or more to have a bankruptcy removed from your credit report.

What Debts Can Be Discharged in Bankruptcy?

Not all debts can be discharged through bankruptcy, although most can. Credit card debt, home mortgages and car loans, for example, can be discharged via bankruptcy. Student loans, child support and recent taxes, however, cannot. Reach out to a bankruptcy expert to see if your specific set of circumstances qualify you for discharge of your debts.

Types of Bankruptcy

The three predominant types of bankruptcy are:

  • Chapter 7 – In which most of your assets are liquidated and most of your debts are discharged.
  • Chapter 13 – In which your debt is restructured into a payment plan that allows you to pay back most of your debts within three to five years.
  • Chapter 11 – A form of bankruptcy typically used by businesses.

The most common types of bankruptcy filed by consumers are Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, also known as straight bankruptcy or liquidation, you liquidate all of your non-exempt assets to help pay down your debt before any of the remaining portions are discharged. Property that may be exempt includes essential household furnishings, tools for work and automobiles. A court-appointed official known as a trustee may sell some of your property or turn it over directly to your creditors. If your debt is primarily unsecured, like personal loans, credit card debt or medical bills, then Chapter 7 might be the best type of bankruptcy for you.

Chapter 13 bankruptcy allows you to keep more of your property, including your car and your house, as long as you can prove you have a steady income. In Chapter 13 bankruptcy, a repayment plan is approved by the court for you to apply future income toward repaying your debts for three to five years instead of giving up your property. Once you have made all the payments required by the plan, your debts are considered discharged. If you have certain assets you would like to retain or you have secured debts you would prefer to make current rather than default on, Chapter 13 bankruptcy might be the better option of the two for you. Chapter 11 bankruptcy, also known as reorganization bankruptcy, is used by businesses and corporations that wish to maintain operations rather than close down.

Eligibility for Bankruptcy

To file for Chapter 7 bankruptcy, you must first pass a means test to see if you even qualify. You cannot have discharged debt through a Chapter 7 bankruptcy filing anytime in the previous eight years or through a Chapter 13 filing in the previous six years. You also cannot have filed a petition for bankruptcy in the last 180 days that got dismissed due to your failure to comply with court orders or appear in court.

To file for Chapter 13 bankruptcy, you must be earning a steady and reliable income and be current on all your tax filings. You must not have filed a petition for Chapter 13 bankruptcy in the previous two years or for Chapter 7 bankruptcy in the previous four years. You also must not have filed for bankruptcy in the last 180 days that got dismissed because you failed to comply with orders of the court or appear in court.

To file for Chapter 11 bankruptcy, you must not have filed a petition for bankruptcy in the last 180 days that got dismissed due to your failure to comply with court orders or appear in court. It must also not have been dismissed voluntarily due to your creditors seeking relief from the court to recover property on which they had liens.

 

Is bankruptcy the right choice for you?

Filing a bankruptcy petition is a serious decision that can have long-lasting implications for your life. Therefore, bankruptcy should only be entered into under dire circumstances and with full knowledge and understanding of the consequences. It may be wise or helpful to file bankruptcy if you cannot see any other way to pay your debts off within five years. Additionally, if your debt not including is more than half of your income, you may also want to file for bankruptcy. When you are considering your debt to income ratio, you typically exclude your mortgage.

Bankruptcy may also be right for you if you are paying as much as you are able toward your debts yet making no progress in paying them down. If your debt payments are keeping you from achieving other monetary goals, like saving for your retirement, then bankruptcy could be useful as well.

Filing and Consequences of Bankruptcy

Whichever type of bankruptcy you wish to declare, you must file for it in federal bankruptcy court. To file a petition for bankruptcy, you must pay filing fees of a few hundred dollars, not including any attorney’s fees you may pay for legal representation.

After a judge has officially approved your request to declare bankruptcy, it will remain on your credit reports for 10 years. With such a record on your report, it can be next to impossible to get a credit card, take out a home or car loan or buy life insurance. Sometimes, a bankruptcy on your credit history could even prevent you from getting a job.

 

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