What Does Filing For Bankruptcy Mean For Your Finances?
If you are in a considerable amount of debt, you may be considering filing for bankruptcy. This may seem like an easy way out, but there is much more to filing for bankruptcy than most people realize. In this post we will cover what bankruptcy is, how it works and what the difference is between Chapter 7 and Chapter 13 bankruptcy.
What Exactly Is Bankruptcy?
Filing for bankruptcy is a legal process in which a person declares that he/she is not able to pay their outstanding debts. According to data from U.S. courts, 97% of bankruptcy cases filed in 2019 were by individuals. In most cases, people have taken on too many financial obligations like a mortgage, auto loan or student loan, and they don’t have the income to pay for it all. Depending on how you file, you will be either wiping the debt slate clean or developing a 3-5 year plan to repay all your debt.
Filing for bankruptcy is better than getting your wages garnished or having creditors calling you non-stop, but it should really be your last choice for getting rid of debt.
How Does Filing For Bankruptcy Work?
The bankruptcy process is very complex and really not something to enter into without proper guidance. Not to mention, it is not cheap. If you decide to file for bankruptcy on your own, you will need to get in touch with the bankruptcy court in your state. You will be assigned a trustee who will handle filing paperwork and overseeing your estate (anything you own) while your case is in progress.
A bankruptcy judge will be the one who decides whether to discharge your debts. They may choose to deny you for these reasons:
- Adequate financial records can’t be produced.
- You failed to explain any loss of assets.
- A crime like perjury has been committed .
- You didn’t disclose an owned property that would have been included in your estate.
- A lawful order of the bankruptcy court was not complied with.
With that being said, if you can show that you are truly unable to repay your debts, you should be granted a discharge. Any creditors will no longer be able to track you down for collection.
Chapter 7 Bankruptcy
Chapter 7 is the most common bankruptcy filing that individuals do. It is for those people that can prove that they don’t have the income to pay off their debts. Once you file, a stay goes into affect for your current debts. This means any attempt to collect on the debt or garnishment of wages ceases.
Once you file, your case will be assigned a trustee. They will take ownership of your assets and sell them to repay your creditors. If the sale of those items does not cover the debt you owe, you are still discharged from responsibility for your debts. The process takes about three to six months and anyone who files must complete credit counseling courses within six months of filing.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is for those people that have an income that puts them above the threshold for filing Chapter 7. The trustee assigned to you will work with you to come up with a pay back plan for your debts. This plan will be determined by your household income and how it compares to your state’s median income. Your first payment is due 30 days after filing. The payback timeline is usually 3-5 years and you cannot take on any additional debt during this time.
There are debt limits with Chapter 13 bankruptcy:
- $1,184,200 in secured debt (like a house or car)
- $394,725 in unsecured debt.
What Will Filing For Bankruptcy Do To My Credit Score?
Bankruptcy will show up on your credit report for anywhere between 7-10 years. If you file Chapter 7 bankruptcy (the most common) this will stay on your credit report for 10 years. If you file for Chapter 13 bankruptcy (second most common) it will be on your credit report for seven years. During these years, it may be hard to get new lines of credit or even apply for a job. In order to start improving your credit, you want to start paying your bills on time. As the years pass, you will see your credit improve as long as you stick to positive financial habits.
What To Avoid
Filing for bankruptcy is a legal proceeding judged in federal court. So, being truthful about your situation is essential if you want to avoid serious consequences. Here are things you should never do:
- Hiding any assets for fear of losing them.
- Knowingly file false or incomplete forms.
- Bribery of a court-appointed trustee.
- Filing for bankruptcy multiple times and/or filing in different jurisdictions.
You could be fined and face criminal charges if you engage in any of these activities.
Other Important Details
Here are some additional things you can expect during the bankruptcy process.
- Fees: There are fees associated with filing for Chapter 7 bankruptcy but you can request for them to be waived by filling out this form. For Chapter 13, you can set up a payment plan if you can’t afford the fees upfront. In order to be eligible for a waiver, your household income needs to be under 150% of the poverty line. Check here to see if you qualify. In addition, you have to be unable to make the payments in installments. If you are working with a bankruptcy attorney, you will need to pay their fees as well.
- An automatic stay is put in place: Once you file bankruptcy, all collectors and creditors must cease from trying to collect on your debt. If they do try and collect from you, they will be violating a court order. You can contact the company directly to let them know you are in the midst of bankruptcy and if you don’t get anywhere with that, notify the bankruptcy court.
- These items will not be discharged: Most student loan debt, child support, alimony, most tax debts and debt that you may owe due to a criminal or civil charge.
When it comes to auto loans and mortgages, the debt may be discharged, but the creditor can still seize the property you took out a loan for (i.e. your car).
Filing For Bankruptcy Should Be Your Last Resort
If you debt that is manageable, filing for bankruptcy should be your last option. With that being said, if you are drowning in debt and can’t afford to make payments, this may be your best option. Ultimately, your goal should be to get your finances and credit back on track and if bankruptcy is the only way to do that, then moving forward may be the right move.