What is Bankruptcy?
Financial strife due to medical expenses, marital disputes, and unemployment can happen to anyone. If you’ve ever suffered from one or more of these issues, then you’ve probably experienced the crushing effect that debt can have. Without support, debt can cause more than financial burden—it can destroy lives.
There are options out there that can help you get back to your feet, but when the situation has become dire, you may need to resort to the “nuclear” option: Bankruptcy.
While it’s not always the ideal choice, bankruptcy can be a means of dealing with unbridled debt. It can sometimes be the best way to get a fresh start.
So, what is bankruptcy? Bankruptcy is a court proceeding that frees you from the need to repay debt while giving creditors an opportunity to reclaim some of the lost debt through the liquidation of your available assets. The majority of bankruptcies come in two forms.
Bankruptcies are filed either through Chapter 7 of the U.S. Bankruptcy Code, in which you liquidate your assets, or Chapter 13, where you restructure your payment plan and absolve yourself of a portion of the debt. This allows you a fresh start so you can eventually gain access to consumer credit and the creditors can reclaim some of their investment.
The most common form of non-business bankruptcy that you may encounter is a Chapter 13 personal bankruptcy. Filing Chapter 13 bankruptcy, also known as “wage earner’s bankruptcy,” involves repaying some of your debt to absolve you from the liability of paying the remainder without risking your property.
But how does bankruptcy work? If you’re looking at how to file Chapter 13 bankruptcy, you’ll know that all cases are processed through the federal courts. A bankruptcy judge presides over the case and determines your eligibility to file, as well as whether you have the means to repay the debt.
Who Declares Bankruptcy?
Financial hardships can happen to anyone, individuals and businesses alike. The reason to declare bankruptcy can vary from person to person, but the common thread is that they have more debt than money to cover the payments, and the conditions are unlikely to change.
It’s not uncommon to find yourself in need to learn how to qualify for Chapter 13 bankruptcy. Making large purchases such as properties or cars can easily create a situation that spirals out of hand, leaving you with a debt that far exceeds your income.
The vast majority of those filing bankruptcy are individuals, as opposed to businesses. Most of these individuals are in the lower-middle-class bracket and attempt to file for Chapter 7 bankruptcy. Those who are opting for bankruptcy but don’t fulfill Chapter 7 requirements, file Chapter 13.
It is essential to understand that while bankruptcy is a chance to start over, it definitely affects your credit and future ability to use money. It may prevent or delay foreclosure on a home and repossession of a car, and it can also stop wage garnishment and other legal actions creditors use to collect debts.
What is bankruptcy‘s biggest advantage? The main purpose of filing for bankruptcy is to absolve you from your current debt. You may need to do it to keep your home, hold on to your vehicle, or stop a creditor from garnishing your wages. Filing for bankruptcy will also inhibit debt collectors from contacting you or taking legal actions against you.
Despite the fact that a bankruptcy filing will remain on your record for 7-10 years, if the majority of your debt was discharged, you can immediately start building credit. You may also benefit from being debt-free because you can learn new money habits and hopefully avoid repeating previous mistakes.
While bankruptcy has an obvious advantage, many are unaware of the drawbacks of filing for Chapter 7 or Chapter 13. The main drawback is that bankruptcy lasts for 7-10 years on your record, which can have future impacts that you may not have planned for.
Here are some of the most notable disadvantages of filing for bankruptcy:
- Not all debt is dischargeable (such as child support, alimony, tax debt, and student loans).
- If your personal property or real estate hasn’t been exempted, then it could be sold off to repay creditors.
- You may lose access to credit cards.
- You may not be able to take out a loan or a mortgage.
- Bankruptcy is on your record for potential employers and landlords to review, potentially inhibiting your chance at a job or a place to live.
- You may not be eligible for state or federal tax refunds.
- Filing for Chapter 7 bankruptcy inhibits you from refiling for eight years, meaning that you may have to endure new financial hardships if you reaccumulate debt.
- It can increase your insurance premiums.
When to File for Bankruptcy
There isn’t a hard-and-fast rule as to the best time to file bankruptcy. However, there are some guidelines that you can use to determine if it’s the right choice for you in your current situation.
If your debt is over $15,000 and has become unmanageable, or if you can’t see yourself recovering from debt within the next five years, you may need to start weighing your options.
Bankruptcy was designed to give people a chance to start over. It’s assumed that people will make bad financial decisions in life at some point, and bankruptcy is the option that allows people to not have to bear those choices for their entire lives.
Bankruptcy is commonly considered a last resort choice though, because of its lingering disadvantages. If you have future plans to own property or are worried about how a bankruptcy will affect your chances of taking a job, then you may want to look to other options. There are debt-relief programs available to help you settle with creditors without risking your home and property.
Types of Bankruptcy
The United States has an established Bankruptcy Code containing several chapters for individuals and various businesses to seek alleviation from debt. The different chapters have specific requirements that must be met in order to qualify and the filing fees being contingent on the state where the bankruptcy is being filed.
Chapter 7 bankruptcy is best for those with few assets at risk of being liquidated. If you’re currently swimming in credit card debt or hospital fees, then Chapter 7 gives you a chance to discharge this debt.
However, if you hold assets that are nonexempt, such as rental properties, securities, or cash, then they can be used to pay down your debt.
If you only maintain your primary residence, household goods, and work gear, then you might have your debts discharged without losing any property.
Learning how to file Chapter 13 is best for people that either have secondary homes, family heirlooms, or stocks that are too valuable to let go.
Instead of selling off your property to pay off your creditors, this chapter allows you to create a debt repayment plan, provided you have a steady income to support it. Repayment plans are usually restructured to have installments to pay off the debt within three to five years.
If you fall within this category, this might be your best window of when to file bankruptcy Chapter 13.
There are other chapters in the Bankruptcy Code, but they are specially tailored to specific circumstances. Chapter 9, for instance, deals with a town or municipality that needs to file bankruptcy. Chapter 12 is established to aid family farmers and fishermen with financial relief.
How to File for Bankruptcy
The first thing you need to do on your step to filing Chapter 13 bankruptcy is to get all of your financial records in order. Gather any and every bill, income statement, loan, and mortgage papers. This will give you and financial counselor an overview of your situation.
Before filing, you need to have completed two educational courses before your debt can be discharged.
Your bankruptcy case will be brought before a judge, this means that you have the option of representing yourself, but you would be well-advised to seek legal counsel. After you’ve compiled all of your paperwork and completed your courses, you can either have a lawyer file your petition or do it personally.
After your petition has been accepted, you’ll then meet with a court trustee who will oversee a meeting between you and the creditors involved.
Is Bankruptcy Best for You?
If you’re over your head in debt, bankruptcy is an option, though not usually the best. By filing for Chapter 13, your record will be blackmarked for seven years. If you file for a Chapter 7, then it’ll be logged for ten years. Having a bankruptcy on your record can be detrimental to obtaining future credit, finding certain jobs, and renting from certain locations.
Bankruptcy is usually the only option left when people would rather opt for the less invasive choice of debt consolidation or debt settlement. By choosing to have your finances reviewed by a debt consultant, you can reclaim your financial freedom without carrying a bankruptcy on your record for the better part of a decade.
To learn more about debt relief options and how to avoid needing to file for bankruptcy, call CreditAssociates at 844-378-2633 or apply for a free consultation. Talk to one of our Debt Consultants to see if our program is the right solution for you. You can also find more information via our blog on debt relief vs bankruptcy.