Considering Bankruptcy?

Jul 2, 2013 by

US Bankruptcy CourtBankruptcy is a legal matter. The suggestions here were not written or reviewed by any attorney and do not comprise legal advice. To thoroughly understand bankruptcy and gather all the facts you need to judge whether bankruptcy is the best option for you, meet with a bankruptcy attorney. Most offer free initial consultations, or if you’re low income, try the Legal Services Corporation.

Bankruptcy: Only When You’re Out of Options

You should consider bankruptcy the last resort in dealing with debt challenges. Why?

  • You have a moral and legal obligation to repay legitimate debts, if you are able.
  • A bankruptcy may appear on your credit report for up to 10 years, hammering your credit rating.
  • Insurers, landlords, and employers routinely review customers’ and applicants’ credit reports. You could be denied insurance or pay a higher rate, be turned away from an apartment you’d like to rent, or lose out on a job only because of a past bankruptcy.

But sometimes repaying debts is impossible, or you may be facing an intolerable debt collection threat—like garnishment—that you must stop for your family’s well being. Bankruptcy is for these situations, and if you must do it, then you must.

You’ll be required to go through credit counseling and a financial education class. Welcome these experiences as launching pads for bankruptcy’s fresh start. Resolve not to repeat mistakes you may have made. And educate yourself on what you must do to rebuild your credit.

It won’t happen overnight, but you may be surprised by how quickly your credit score recovers after bankruptcy if you take seriously learning to boost your credit score and focus on doing the right thing with your money.

Types of Bankruptcy

Two types of bankruptcy are available to individuals. Named after sections of the bankruptcy legal code, they’re called Chapter 7 and Chapter 13.

 

Chapter 7
Chapter 7 bankruptcy can discharge—meaning wipe out—most or all of your unsecured debts. Generally, student loans, tax debts, and child support obligations cannot be discharged, even though they’re unsecured.

You will disclose all details of your situation to the bankruptcy court’s Trustee. The Trustee is your creditors’ representative in your bankruptcy case. If you own assets with values over allowed dollar limits, the Trustee can force liquidation (sale) of these “non-exempt” assets and turn over the cash value to your creditors.

The 2005 Bankruptcy Abuse Prevention and Consumer Protection Act tightened qualifications for Chapter 7 bankruptcy. Generally, if your household income is below the median income in your state for your household size, you qualify. But you may qualify even if you don’t meet this criterion. See an attorney to determine whether you qualify for Chapter 7 bankruptcy and whether any assets you own are non-exempt (subject to liquidation).

Chapter 13
Under Chapter 13 bankruptcy the court will impose a debt repayment plan. Your attorney will review all of your financial information and propose to the court Trustee reductions in or discharge of some of your debts along with a monthly payment, typically for a 3-5 year period, to repay the remaining debt. The Trustee cannot compel you to liquidate specific assets, but he or she will not approve any proposal that allows you to keep significant assets while at the same time cutting your debts.

When to File

The timing of a bankruptcy filing can have a huge impact on its effectiveness in solving your financial problems. And if you’re going to take bankruptcy’s big credit rating hit, you surely want to get the most benefit possible from your filing.

Get the Most Bang for Your Bankruptcy Buck

how often can you file for bankruptcy?Though creditors may be hounding you through aggressive collection activity and threats, resist any urge to file bankruptcy just to make them leave you alone or because you can’t now make payments. Why? You may get a Chapter 7 discharge only once every 8 years and a Chapter 13 discharge only once every 6 years. If you file too early and your debts continue to accumulate because your crisis is ongoing, you may find yourself unable to pay debts that build up after bankruptcy. Without bankruptcy’s protection—your ultimate trump card—available to you for several years, you’d be far more vulnerable to creditor lawsuits.

Have a Plan for Success Before Filing Bankruptcy

Wait to file bankruptcy until you have in place a plan to live once again within a balanced budget—that is, below your means. If a debt pay off option fits within that balanced budget, then pay off your debts over time and avoid bankruptcy altogether. If you’re not able to repay your debts, then you may need to file bankruptcy, but you’ll do so knowing your budget will be balanced after bankruptcy’s debt relief kicks in.

Bankruptcy Is a Legal Matter

Bankruptcy law is complex. You need professional legal advice before filing. Please do not regard this article as a substitute for legal advice—it is not.

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  • I would hate to have to file bankruptcy, but I have some friends that have had to. It’s really unfortunate and they didn’t really think about the timing. I think they felt pressured into it.

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