The decision of whether you should file for bankruptcy is daunting. It is understandable to feel anxiety and uncertainty about your circumstance.
Filing bankruptcy is a lofty decision with consequences, but it can be an important step towards gaining financial control.
If you have become overwhelmed by debt after a divorce, an accident or period of unemployment, then you may consider filing for bankruptcy.
Table of Contents:
What Is Bankruptcy?
First of all, we need to clear up what is bankruptcy? Bankruptcy is the legal process to discharge debt that a person or entity has built up and is unable to pay.
The process involves a judge or court-appointed trustee determining a person’s equity, assets, and income to understand how to settle debt with creditors.
The two most common forms used to file bankruptcy are Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 involves liquidating non-exempt property, such as jewelry or a second home, in order to pay off outstanding debts.
The process usually takes about six months but is much faster than Chapter 13. If you have little to no income and few assets, Chapter 7 may be the best form of bankruptcy for you to file.
Chapter 13 Bankruptcy
Chapter 13, also known as the “wage-earner plan”, involves developing a repayment plan over a course of time to help shrink your debt
This form gives you a grace period of three to five years to make payments on your debts. After the grace period ends, any debts that remain are discharged.
If you earn a steady income but need to buy some time, filing Chapter 13 may be the best choice for you.
What Debts Can Bankruptcy Help With?
The idea of having remaining debts discharged after filing bankruptcy can sound appealing.
However, bankruptcy does not help discharge all types of debt.
Bankruptcy can help discharge the following types of debt:
- Credit Card Debt
- Medical Debt
- Car Loans/Leases
- Personal Loans
- Lawsuit Judgments
Bankruptcy cannot help eliminate the following types of debt:
- Student Loans
- Child Support/Alimony Payments
- Income Tax
- Court Fines or other Legal Penalties
- Debts for Personal Injury or Death Due to Drunk Driving
Also, note that any debts that are not accounted for when filing for bankruptcy are not subject to discharge.
Should I File Bankruptcy?
Bankruptcy is often treated as a last resort when it comes to handling overwhelming debt. Recognizing situations that warrant filing bankruptcy can help you avoid it if you can.
Below are some examples of circumstances in which filing for bankruptcy may be necessary.
You’ve Been Unemployed For Some Time
Merely losing your job is not a reason to file for bankruptcy. However, if you have been unemployed for an extended period of time and it is causing bills to pile up, it may be time to consider filing Chapter 7.
Your Home is Nearing Foreclosure
Filing for bankruptcy can issue a stay on any collections or foreclosure activity, which means that creditors cannot continue to harass you for bill payment or repossess your home.
However, bankruptcy cannot prevent creditors from repossessing the property if there is a lien agreement in place.
A lien states that a creditor can repossess the property if you fail to make payments on time. Consult a professional if you are unsure if a creditor has a lien on your home or car.
You Have Substantial Unpaid Medical Bills
One of the most common reasons that people file for bankruptcy is because of overwhelming medical bills.
Filing for Chapter 7 or Chapter 13 can help alleviate the debt of any unpaid medical bills.
You Have Pending Lawsuits for Unpaid Debt
When creditors aren’t getting paid even after involving a collections agency, they may turn to lawsuits.
Bankruptcy will stop creditors from continuing collections activities, but it will not help with any court fees.
It is best to file for bankruptcy before creditors pursue court action to avoid accumulating any legal costs.
Your Wages Are Being Garnished
Wage garnishment is usually the result of a creditor suing you for payment. Filing for bankruptcy will stop all your wages from being garnished and can even help you to get some of your garnished wages back.
You’re 90 Days Overdue On All Your Debts
There are certain conditions that determine your eligibility to file for bankruptcy. Most courts will require that you be at least 90 days overdue on all your debts in order to file for Chapter 7 or Chapter 13.
Otherwise, your circumstance may not be seen as dire enough to file bankruptcy.
Are There Steps I Can Take Before Filing Bankruptcy?
It can be difficult to determine if bankruptcy is your best option. Based on some of the situations listed above, you may decide that your situation is not severe enough to file for bankruptcy.
Even if you feel like your finances are taking over, there are certain steps that you can take to help regain control of your circumstances.
Negotiate With Creditors
When you file for bankruptcy, any debt that remains unpaid after filing is dismissed by the court.
Creditors would rather negotiate with you than have the debt discharged. Try negotiating with your creditors to set up a reasonable payment plan based on your income and assets.
If you cannot successfully negotiate with your creditors, you may seek the assistance of a consumer credit counselor.
Credit counseling involves a consumer credit counselor negotiating lower interest rates and monthly payments with creditors.
Typically, a judge will require that you attend credit counseling for a certain period of time before filing for bankruptcy. If you feel like your finances are headed in that direction, it is definitely worth a shot.
What Should I Know About Filing Bankruptcy?
Once you have decided that it is time to file for bankruptcy, it is important to file properly and be cognizant of the consequences.
Below are some things to keep in mind about filing bankruptcy.
Hire an Attorney
An attorney can help you navigate the bankruptcy process. Bankruptcy laws are complicated, and it is advisable that you have a professional to represent you.
Attorney fees typically cost anywhere from $2,000 to $4,000. This may seem expensive, but it is better than accumulating penalties and fees by filing incorrectly
It Will Affect Your Credit
Bankruptcy filings stay on your credit report for seven to ten years. Your score can be affected anywhere from 50-200 points, depending on how high your credit score is.
This will impact your ability to qualify for certain loans and low interest rates.
It Will Become Public Record
While bankruptcy only affects your credit for a certain period of time, it will remain on your public record indefinitely.
Future lenders will know if you have declared bankruptcy in the past and can make decisions based on this. However, employers cannot terminate you based on your bankruptcy status.
There Is a Fee of About $300
With attorney fees and property liquidation, this fee may feel like salt in the wound.
However, the fee can be waived if your household income is less than 150% of the poverty lines.
Is It A Good Idea to File Bankruptcy?
Filing for bankruptcy can feel like rock bottom. But if your circumstances demand it, it can be an important first step in financial recovery.
Bankruptcy laws are designed to help people that are drowning in debt. If filing for bankruptcy is the best option for a fresh start, then take advantage of it.