What is Bankruptcy?
Bankruptcy is a process that lets an individual or a company file a petition through the courts because they find they cannot pay their debts that have a stranglehold on them. These fillings go through Chapters as stipulated by the U.S. courts.
The bankruptcy process is overseen by the federal courts and is outlined by the U.S Bankruptcy Code, where they are distinguished as Chapters of Bankruptcy and are applied according to qualifications that establish eligibility. With this, you will enjoy peace of mind while getting a fresh start financially. There are a variety of bankruptcy Chapters to choose from according to your qualifications. You cannot just choose a particular bankruptcy because you like it, for you must qualify for it. The two most common bankruptcy chapters are Chapter 7 and Chapter 13. The filing of a bankruptcy petition is associated with your bankruptcy needs. Of course there are advantages and disadvantages to filing a bankruptcy petition, and Start New Financial will cover some of these in this article, as well as the difference between these two chapters of bankruptcy.
Chapter 13 vs. Chapter 7
These are the two types of personal bankruptcy options available
- When someone mentions bankruptcy, what people usually think of is a Chapter 7, also known as liquidation bankruptcy. You must first pass a “means test” in order to qualify for a Chapter 7 bankruptcy, even though there is no debt maximum or minimum to file for it. People with sizable assets or high incomes are excluded in this manner since Chapter 7 wasn’t meant for them. Chapter 13 is for those who are excluded from qualifying for Chapter 7 bankruptcy.
- Your non-exempt assets, such as your car, home, and investments will be appraised by a court-appointed trustee who will determine their market value, if you meet the income requirements to qualify for Chapter 7 bankruptcy. The majority of your financial obligations to your creditors are wiped out with the money from your assets that the court-appointed trustee sells off for you.
- Your qualified debt is cleared and no additional payments need to be made after approximately three to six months, which is generally what the entire process takes. This is how a Chapter 7 Bankruptcy functions.
- The standard option when you have a steady income and make too much money to qualify for Chapter 7 is a Chapter 13 Bankruptcy. You will file for Chapter 13, which is also called the wage earner’s bankruptcy. With Chapter 13 bankruptcy, you restructure your debt to be repaid over a three-to-five year period, instead of having your debt discharged. For bankruptcy, there is no debt minimum, but your unsecured debt must not exceed $394,725 and your secured debt must not exceed $1,184,200. When filing for Chapter 13, you may also include overdue mortgage payments on your repayment plan to avoid foreclosure, unlike a Chapter 7 bankruptcy. Your income and the value of your non-exempt property, will determine the length of your plan and the amount you’ll have to repay. With what you currently earn, you’ll make monthly payments to settle as much of your unsecured debt as possible. The main benefit of sticking to the proposed plan is that you get to keep your valuable assets. Your qualified debts will be considered paid off once the payment plan is complete.
You need to consider your ability to repay your debts and whether you have property that you wish to keep, when figuring out which type of bankruptcy to file. Your assets will be liquidated when filing for Chapter 7 bankruptcy, and generally your debts will all be discharged. If you have a steady income and want to hold onto your assets, Chapter 13 bankruptcy will be your best option. Seek legal advice from a bankruptcy lawyer to determine which of these options is right for you. For we do not offer legal advice at all.
The goal of bankruptcy is to give you a fresh start from unmanageable debt, this is often seen as an option of a last resort. This will allow you to repay your debt under different terms from your original agreements with your creditors; it is a legal process that could help clear away some or all of your financial obligations. If you qualify for bankruptcy, many consumer debts are dischargeable, which means that the debt could be forgiven or renegotiated. Debts that qualify for bankruptcy include:
- Personal loan and credit card debt
- Collection accounts debt
- Medical bills
- Utility bills
- Business debts
- Auto accident claims
The bankruptcy court will first review your case in detail once you file. Secondly, the bankruptcy court will assess all of your debts, liabilities, and assets to determine if you qualify. Some of your non-exempt property, or assets that are included in the bankruptcy and can be sold, may be used as repayment towards your outstanding liabilities depending on the type of bankruptcy you are eligible for and your amount of debt.
As mentioned, these are the two types of bankruptcies that consumers generally file for, each with its own advantages of filing for bankruptcy as well as their disadvantages of bankruptcy. Anyone can file for bankruptcy, but depending on your income, assets, and if you have filed for bankruptcy before, your options could vary. However, most tax debts, child support, and spousal support will still need to be paid regularly. Every different chapter of bankruptcy shares the common denominator in the disadvantages of bankruptcy category of having a terrible impact on your credit report.
Consider the Advantages and Disadvantages of Filing for Bankruptcy:
When filing for a petition for bankruptcy, all your credit card privileges will have to be gone, and your credit card report will show it for at least 6 years. There are certain debt obligations that are excluded from bankruptcy petitions such as child support, alimony, student loans, fines and secured debts such as mortgages. During the bankruptcy period, you will be refrained from being in charge of a trust fund or even becoming a director of a company, thus diminishing your employment opportunities.
You will not be eligible for any tax returns during the bankruptcy period, and your non-essential assets will be lost – as the court-appointed trustee will sell them off to pay your creditors.
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Advantages of a Chapter 7
Chapter 7 bankruptcy clears you of all your debt obligations and you stay with no more deficiencies. You potentially can get to keep property. Your creditors will also be barred from attempting to collect the debt from you and it also stops debt collection lawsuits as well. The actual process of a Chapter 7 petition takes from 3-6 months for a discharge after you file, which is very quick. A Chapter 7 is less expansive than a Chapter 13 bankruptcy.
Disadvantages of a Chapter 7
It is difficult to qualify for Chapter 7 bankruptcy and it creates long-term damage to your credit. There are income requirements in order to be eligible for Chapter 7. You can potentially lose property if you file for Chapter 7 and the usage of credit cards are taken away. It is harder to prevent foreclosure when you file for Chapter 7. Alimony, child support, student loans, restitution, some judgments, most government debt and most taxes are not dischargeable in bankruptcy. When you complete your bankruptcy case, you continue to owe these debts if you file under Chapter 7.
Advantages of a Chapter 13
You can get started on rebuilding your credit sooner if you declare bankruptcy now. While Chapter 7 only allows you to file once every six years, you can always get a Chapter 13 plan whenever you suffer another disaster before you’re entitled to file for Chapter 7.
Each filing will appear on your credit record but you may file for a Chapter 13 plan repeatedly.
Individual creditors can’t obligate you to pay them in full once you successfully complete a repayment plan under Chapter 13.
The six-year bar doesn’t apply to you if in good faith you obtained a Chapter 13 discharge after paying at least 70% of your unsecured debts.
You get to keep the property you’re making payments on while you’re making payments under a Chapter 13 plan.
A Chapter 13 bankruptcy is less complicated to explain to a future lender than repossessions, defaults, missed debt payments, and lawsuits, though it does stay in your credit report for years.
You may be able to stretch out your debt payments, give up an item of your property that you’re making payments on, or reduce the amounts of your payments. Chapter 13 trustees may be flexible on the terms of your payments and you’ll have more time to make your payments since it generally takes longer for you to pay off your debts.
Although it will be at a much higher interest rate, you may also be able to obtain new lines of credit within one to three years of filing bankruptcy.
It is unfair to characterize as a “bad risk” someone who’s taken a major step to solve their financial difficulties, but that is what people who file for bankruptcy are categorized as; however, there are lenders who specialize in lending to “bad risks”.
No chapter of bankruptcy can relieve you of your child support and alimony obligations, but at least bankruptcy will alleviate many of your other financial obligations
Bankruptcy can only prevent your lenders from aggressive collection action, but it can’t rid you of your student loan debt.
Believe us when we tell you that both trustees and judges in your bankruptcy case have heard far worse stories than yours – so don’t be embarrassed nor feel bad. Those things happen in life.
By not asking to have your case dismissed when a creditor asks for relief from the stay and by observing all court rules and court orders you can avoid these harsh limitations against refiling for bankruptcy. These limitations don’t last forever even if they apply to you. You just can’t refile for six months. To avoid limiting your bankruptcy options in the future, it would be wise to consult an attorney.
The number and amount of debts that a bankruptcy court can relieve you from paying are potentially unlimited if you don’t owe money on the type of debts that survive bankruptcy.
Disadvantages of a Chapter 13
Under a Chapter 13 plan, it can take up to five years for you to repay your debts.
After paying for necessities such as food, medical care, and shelter that are considered indisposable income, your debts must be paid out of the remainder, which is your disposable income. That means that during the entire repayment plan all of your extra cash is thus tied up.
A Chapter 13 bankruptcy can remain on your credit report for up to 10 years
All your credit cards will have to be closed.
If you don’t already have one, bankruptcy will make it nearly impossible to get a mortgage.
If within the last six years you previously went through bankruptcy proceedings under Chapter 13 then you can’t file for Chapter 7 bankruptcy.
It will be harder to declare Chapter 7 bankruptcy later if you declare under Chapter 13 now.
Bankruptcy won’t relieve you of your obligations to pay child support and/or alimony.
Your student loan debt cannot be wiped off by bankruptcy.
You’ll have to explain how you got into your situation to a trustee or judge.
You can’t file for Chapter 13 bankruptcy if a previous Chapter 13 or Chapter 7 case was dismissed within the past 180 days because:
- You requested the dismissal after a creditor asked for relief from the automatic stay OR
- You violated a court order
Even after bankruptcy proceedings are completed, you may still be obligated to pay some of your debts, such as a mortgage lien.
How to File for Bankruptcy
There are some things to consider once you have made up your mind to file for bankruptcy. The actual filing for bankruptcy costs money, and even though you can file for bankruptcy on your own (pro se), it is not advisable. The hiring of an attorney costs money, but they will be in charge of filing all the paperwork and fighting for you with their training, skills and experience, relieving you of this task.
The following is the process or steps required to file for bankruptcy. Whether you chose to hire an attorney or file for bankruptcy on your own.
1. Assemble your financial information
The court-appointed trustee may request additional documentation to better understand or verify the amounts you claim. This is why you must include all of your debts, income, expenses, and assets. All your records must be kept easily available.
2. Undergo credit counseling
You are required to take a bankruptcy course from an approved credit counseling agency when you file for bankruptcy. This type of counseling will often take just an hour or two and is frequently conducted online or over the phone. You will need to provide proof that you have received credit counseling when you file your petition, since the finding of an agency is left up to you.
You need to fill out the necessary bankruptcy petitions and submit them to your local bankruptcy court once you take the bankruptcy course. Your creditors will receive a notice that you have included their debt in your bankruptcy filing. An automatic stay will be placed to prohibit your creditors from making any further collection attempts after your petition has been accepted.
3. Attend the 341 hearing
The trustee will set up a meeting, or a 341 hearing, for your creditors and lenders. This will take place approximately three to six weeks after your filing. Even though your creditors and lenders are not required to attend, it is mandatory that you do attend. The creditors will have the opportunity to question you or the trustee during this meeting. At this point, you will then confirm whether you wish to move forward with the bankruptcy proceeding.
4. Address formal objections
Your creditors may object to a discharge of a particular debt based on when or how you took on the debt, as soon as they have had the chance to question you and review your repayment plan. Once the objection is filed, both sides will have the opportunity to respond to it and present evidence as to why the debt should be discharged or not. Your bankruptcy petition may proceed if there are no further objections.
5. Repay your creditors
The first step of Chapter 7 bankruptcy is to liquidate your assets. The trustee will pay your creditors from the proceeds before the remainder of your debt will be discharged. A judge will approve your repayment plan at a confirmation hearing during a Chapter 13 bankruptcy filing. The rest of your qualified debt will be cleared after completing the plan.
6. Undergo post-bankruptcy credit counseling
You will need to attend post-bankruptcy credit counseling once you have had your 341 hearing (Chapter 7) or are about to make your last debt repayment (Chapter 13). Your debts cannot be discharged and the bankruptcy process cannot be finalized until you provide confirmation to the trustee that you have completed the post-bankruptcy counseling.
Note: The length of time between bankruptcies depends on the type of bankruptcy in each case. You cannot successively declare bankruptcy within a short period of time.
Can I File for Bankruptcy on My Own?
Many people choose to hire an attorney to help them stay on track since filing for bankruptcy is a complex process that requires a lot of paperwork. Keep in mind that the average cost for an attorney largely depends on the complexity of your case. While you have the option to file for bankruptcy on your own, people who work with an attorney may fare better than those who don’t. You can top expertise and experience, ya know!
There is no guarantee that your petition will be approved or that your debt will be cleared once you file for bankruptcy. The court can prevent certain debts from being discharged, and your creditors can also raise objections. The court can revoke a discharge that has already been issued if there are reasons to believe it shouldn’t have been issued in the first place. This is why it is helpful to have a professional guide you through the bankruptcy process.
Bankruptcy Benefits & Risks
The decision to file for bankruptcy should be considered carefully, weighing not only the benefits but also the drawbacks. While bankruptcy could lighten some of your financial burdens, it isn’t the best option for every situation. There are major impacts to your credit as well as serious short-term and long-term financial implications. Here are the main benefits and risks of bankruptcy:
The main benefit of filing for bankruptcy is being granted an automatic stay. Your creditors, lenders, and debt collectors may not contact you for additional repayment or take other actions against you.
In Chapter 13, you may keep your assets as long as you stick to your repayment plan. You may also be able to delay or stop a foreclosure or car repossession, allowing you to hold on to some of your prized assets.
Any debts that are written off are gone for good leaving you with a clean slate, and so you could have a chance to rebuild credit and improve your finances. Some debts may be fully discharged as well.
A Chapter 13 bankruptcy stays on your report for 7 years, and a Chapter 7 bankruptcy stays on your report for 10 years from the final discharge date. This is why your credit score will take a major hit.
Depending on which type of bankruptcy you qualify for, your income, the equity in your assets and other factors, you may lose your home, car, and other property. You could lose valuable or prized assets.
All debts may not be discharged. This includes child support, some taxes, court orders, spousal support, and debts incurred through fraud.
Even though you may qualify for new credit after bankruptcy, new financing may be a challenge. You’ll likely see higher interest rates and fees. Making a big purchase, like a home, may take a few years before you can realistically consider it.
Bankruptcies are publicly reported and are of public record. There is a potential for people you know to discover that you have filed such a petition.
Other Debt Relief Options
There are other options such as a debt consolidation loan or debt settlement. If you have so much debt that you are considering bankruptcy, you will realize that most do-it-yourself debt solutions probably won’t work. A debt consolidation loan gives you enough money to pay off multiple debts at the same time and leaves you with a more manageable monthly payment and a lower interest rate for it to work ideally. Essentially, you will be taking a new debt to pay off multiple existing debts. While it may seem illogical, the right debt consolidation loan could potentially get you a lower interest rate, simplify your payments, and help you get ahead and out of debt faster.
Debt consolidation is only a good option if your debts aren’t excessive, you have steady cash flow to cover your payments, and you have a solid plan to keep your debt in check. If you’re already struggling to make your monthly payments, taking out a new loan could put you in a deeper hole, unless it’s the ideal consolidation loan with a much lower monthly payment. In order to qualify for a debt consolidation loan, you must have good credit.
Debt settlement offers an affordable way to resolve your debts, if your credit is too poor to qualify for a debt consolidation loan. With the right debt settlement company like Start New Financial to negotiate with your creditors to get them to accept a lower amount on what you owe, this could help you save money and get out of debt faster. Start New Financial provides you more details about how debt settlement works by you simply calling us for your FREE consultation.
If you have $7,500 or more in debt, are struggling to make your monthly payments, and are considering filing for bankruptcy, it might be worth your time to get a no-obligation debt evaluation from Start New Financial to see if you qualify for one of our programs which would much better serve you than a last resort bankruptcy. Debt settlement does affect your credit, but it’s much less of an impact than filing for bankruptcy.
Which Debt Solution Is Right for You?
Bankruptcy is the right debt solution for some people, but it’s not the right solution for everyone. Once your bankruptcy is discharged, there is no turning back. It’s with reason that it is considered a last resort. It’s important to think past the immediate relief that bankruptcy could bring and weigh in all of your debt relief options to make sure you are choosing the best solution for both the short term and the long term. You cannot undo the decision, and the consequences will stay with you for such a long time that it’ll seem like an eternity. You’re better off if you qualify for other debt relief options such as debt consolidation, debt settlement, debt management, and credit counseling.
You can always get help over the phone from a friendly Certified Debt Consultant at Start New Financial. Call us at (800) 320-9083 to get your free, no-obligation consultation and advice on all your debt questions and options. We are here to help.
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