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Bankruptcy

How to File for Bankruptcy



Feeling crushed by debt is one of the most stressful situations possible, but there are options. If you find yourself saddled with more debt than you can reasonably pay off in a timely manner, you can always file for bankruptcy.

Filing for bankruptcy is a serious step, and one that often has a bit of a negative connotation, as some people worry that it’s a sign they failed in some way, or they might worry that they’ll carry around a financial stigma for a while that will affect their credit.

But sometimes bankruptcy is the best way to get a new start so you can then stay on top of your finances, and with hard work, you can begin to turn your financial life around. To help you better understand how bankruptcy works, we reached out to financial lawyers who specialize in guiding their clients through the process.

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About Bankruptcy

If a person or a business can no longer meet their outstanding debts, they can begin the legal proceeding known as bankruptcy. When this happens, the debtor files a petition to a federal bankruptcy court in which their assets are measured and evaluated. From there, depending on what type of bankruptcy they file for, their assets may or may not be used to repay part of their debt.

When Bankruptcy Makes Sense

Filing for bankruptcy is a big step, but sometimes it is the right one. Of course, it’s not for everyone. Camron Hoorfar, J.D. LL.M is the spokesperson for Debt Consolidation Care and an attorney who helps his clients deal with bankruptcy, and he says sometimes it’s the best option people have at their disposal.

“If you are struggling to repay consumer debts, and all other debt-relief options have failed, then you can consider filing bankruptcy,” says Hoorfar. “It may be the only resort to get rid of debts when you have insufficient income to repay them.”

He also says that a bankruptcy filer will need to complete credit counseling, and meet specific income guideline requirements that will vary based on the type of bankruptcy you’re filing.

Different Types Of Bankruptcies

There are several different types of bankruptcies, but the majority of individuals can only file for Chapter 7, which is also known as liquidation bankruptcy, and Chapter 13 bankruptcy, which is also known as the wage earner’s plan.

“Chapter 7 bankruptcy can help you wipe some or all your debts in a few months. However, you may have to surrender your assets like cash, property, etc. It stays on your credit reports for ten years.”

“Whereas with Chapter 13 bankruptcy, some of your debts will get discharged, but you can keep your property and repay the debt through a three to five year repayment plan approved by the bankruptcy court,” says Hoorfar. “It will stay on your credit report for seven years.”

Finding The Right Lawyer

The first step to filing for bankruptcy is to find the right lawyer. While you can try to go through the process on your own, it would be a bit like representing yourself in court; i.e. you’d have a fool for a client. According to Hoorfar, a lawyer can help you in the following ways.

-Advise you on whether you need to file bankruptcy and, if yes, which chapter to file.

-Educate you on bankruptcy law and procedures.

-Help you file bankruptcy forms.

-Give you an idea of what debts you can discharge.

-Advise you on whether you’ll be able to keep your house, vehicle, or any other property in bankruptcy.

-Tell you the tax consequences of filing a bankruptcy.

-Assist you wherever you need any help until you get discharged from your debts.

When looking for a lawyer, Wesley M. Scott, a Managing Partner at the Minnesota bankruptcy law firm LifeBack Law recommends that you choose “only bankruptcy law firms that are within your state and do nothing but Chapter 7 and 13 Bankruptcy work.”

Additionally, Scott says you check out their reviews and then “interview them. Do you feel welcomed and informed? If not, trust your gut and interview other lawyers.”

Documents You Will Need

Before you file for bankruptcy in a federal court, get the following documents prepared.

-A valid photo identity.

-Tax returns for the last two years (in case of Chapter 7) and four years (in case of Chapter 13).

-Pay stubs for the past six months before the bankruptcy.

-Last two W-2s.

-Retirement and bank account statements.

-Proof of your property’s fair market value and your vehicle’s value. This will be known as Schedule One, so make sure to include any liens against the property

-Mortgage statements showing current balances and monthly payment amounts.

-Recent loan statement of your vehicle showing how much you owe and your monthly payment towards the loan.

-Everything you own that is not real estate, which is known as Schedule Two. This includes jewelry, collectibles, stocks, retirement savings, and household goods. Make certain to include the value of each piece so the court is aware of the total value of your assets.

-Copy of vehicle registration and proof of insurance.

-Other documents like child support, alimony, or any other unusual expense, if any.

How Much Does It Cost To File For Bankruptcy?

“In total, you may have to spend approximately $838 – $3,838 with Chapter 7,” says Hoorfar, “and $1,813 – $6,313 with Chapter 13 bankruptcy.”

What Not To Do Before Filing For Bankruptcy

As soon as you decide to file for bankruptcy, go ahead and consider your accounts frozen. In addition to, obviously, not taking on any new debt, don’t make any steps to pay back anyone. While it may be a well-intentioned gesture, it will only lead to headaches.

“Never transfer any assets prior to bankruptcy without consulting a bankruptcy lawyer first. People mistakenly assume certain assets may not be protected, so they transfer the assets out of their name,” says Scott. “That creates a huge problem because now the asset is sure to be lost to the bankrupt estate. Transferring an asset within two years of filing the bankruptcy for no value is considered a fraudulent transfer.”

“Second, do not pay business partners or family or friends any money you owe them prior to filing bankruptcy,” says Scott. “The payment might be construed as a ‘preference’ and the payment may be avoided and brought back into the estate and paid to all creditors pro-rata. Again, best to consult with a quality bankruptcy lawyer before doing anything.”

How To File For Bankruptcy

Contrary to popular opinion, there is more to filing for bankruptcy than simply saying out loud, “I declare bankruptcy!”

Once you have the right lawyer and have made the decision to file for bankruptcy, which will take place at a federal court, “the actual process looks like this,” according to Scott.

-“First, a bankruptcy petition and schedules must be prepared to document your assets and debts and other financial questions.”

-“Second, review the schedules to make sure they are true, correct, and complete. If they are, you sign them.”

-“Third, the schedules get filed with the court. Upon filing of the bankruptcy schedules you have invoked an injunction against most creditor collection activity; in other words, they must stop all collection activity.”

-“Fourth, you attend a meeting of creditors. The purpose of the hearing is to confirm your schedules are true, correct, and complete. Following this meeting, you receive your bankruptcy discharge in about 60 days. A bankruptcy discharge means you are no longer legally liable for dischargeable debts like credit cards and medical bills, among many others.”

How Bankruptcy Affects Your Credit Score

As you might suspect, filing for bankruptcy has a negative effect on your credit report and score, as Hoorfar says an individual with a 780 or greater credit score can lose about 200 to 240 points due to bankruptcy.

While bankruptcy might seem like a final option for many, it’s not the death blow to your credit score that it might seem.

“In my opinion, filing bankruptcy improves your credit profile. This is hard for some people to understand. But I ask them how is your credit now? If you have a 100k in credit card debt and you are delinquent on your payments, your credit already stinks,” says Scott. “Even if you are current on your 100k in debt payments, and your credit score is high, to me, you are a poor credit risk. Why? Because if I am a future lender do I really want to climb on top of this pile of debt and risk that I might be the straw that breaks the camel’s back and you file bankruptcy?”

Scott adds that “at the end of the day, having less or no debt is better than having 100k in debt. Future lenders don’t care if you are currently $100k in debt. What they truly want to know is will you be able to pay the loan I give you now?”

Rebuilding Credit Post Bankruptcy

Hoorfar recommends taking the following steps to repair your credit after bankruptcy.

-Continue paying on your non-bankruptcy accounts.

-Take the help of a cosigner or become an authorized user of an account if you can’t get new credit alone.

-After getting discharged from debts, swipe your credit cards only for an amount you can comfortably pay every billing cycle.

-Make sure your payments get reported to all major credit bureaus.

“However, it may take about two years to improve your credit score after getting discharged from debts in bankruptcy,” he says.

Alternatives To Bankruptcy

Bankruptcy is sometimes a necessary choice, but there’s also a few other options available to people struggling with debt. Some of it might depend on how deep your debt has gotten, or what you are comfortable with.

“If you can repay your debts in full but need professional guidance, you can enroll in a debt consolidation program,” Hoorfar. “Whereas, if you can’t pay your debts in full, you can enroll in a debt settlement program. In both options, you can repay your debts through single monthly payments over a certain period.”

If you owe money to multiple creditors, a debt consolidation loan can help. With a debt consolidation loan, you will get one new loan to replace your multiple other ones, often at a lower interest rate. “Then, you can repay your consolidation loan through single monthly payments over a definite period,” says Hoorfar.

“Debt consolidation can help you protect your credit rating, whereas bankruptcy can lower your score to some extent. You can lose your property in case of bankruptcy, but it doesn’t happen with a debt consolidation loan. However, you can lose your property if you keep collateral to take out a consolidation loan and can’t pay it back,” he adds.

In bankruptcy, you can have a fresh financial start, whereas, with debt consolidation, you will have to repay debts and manage finances on your own.”

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Moving Forward

Bankruptcy is tough, but remember that it’s not the end of the world, just a step along the journey to a better financial future.

“In the end, I would like to add that even if you have to file bankruptcy, do not be disheartened,” says Hoorfar. “Once you get discharged from your debts, focus on managing your finances effectively. By doing so, you can improve your credit score with time and have a good financial life.”

 

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