In the financial world, filing for personal bankruptcy is considered a last-resort option to cope with mounting debt. Bankruptcy is poorly interpreted by many individuals, however, so it’s essential to understand how it can affect your finances. As Steve Carrell’s character on The Office found out, you don’t declare bankruptcy by shouting, “I declare bankruptcy!”
Find out what happens when you file and how you (and your credit) can even come out on the other side in one piece.
Types of Bankruptcies
When people and businesses realize there’s no way they can meet their debt obligations, they file for bankruptcy. While this type of scenario can happen from amassing large amounts of credit card debt, many times, people file for bankruptcy because they have endured significant financial hardship. Unforeseen medical bills, an illness, or a long-term period of unemployment can affect even the most financially responsible.
Even though it’s commonly thought that bankruptcy is a fresh start that erases all debt, that’s not exactly true. People who claim this still have to pay up, and the method for paying varies depending on which type you file for: Chapter 7, Chapter 11 or Chapter 13.
Filing for Chapter 7 means you may have to liquidate certain personal assets, such as a car or second home, to help pay off at least some of the debt. Keep in mind that most of your assets are probably exempt from this (so you don’t have to give up everything). What you will need to sacrifice depends on your state, financial situation, and whether the asset in question is considered to be essential.
Typically, you have to meet specific eligibility requirements to file, including income level. You generally have to have little to no disposable income to file for Chapter 7.
With Chapter 13, you typically work out a plan to pay off your debt gradually within the next three to five years, and you keep whatever personal assets you have.
In some cases, a portion of that debt ends up discharged, but that’s not always the case. It’s important here to remember the difference between secured debt and unsecured debt.
- Secured debt: When debt is considered secured, something of value, such as a house or an automobile, acts as collateral. If you don’t send in your payments, the lender can seize the collateral and resell it to recoup their costs.
- Unsecured debt: This type has no collateral and, therefore, is considered unsecured. The only thing guaranteeing you’ll repay the debt is your promise and perhaps a signed agreement. The lender has the option of taking you to court if you don’t pay, but court costs can be prohibitive. Generally speaking, the lender has little recourse if you don’t pay this debt back. Types of unsecured debt include credit cards, personal loans, and medical bills..
In order to qualify for Chapter 13, your secured debts can’t be more than $1,149,525 and your unsecured debts can’t be more than $383,175.
Chapter 11 works similarly to Chapter 13, but it’s typically reserved for businesses only, not for instances of personal bankruptcy. Companies generally reorganize or restructure when this happens. While they do get to keep their assets, continuing operations as usual, they must come up with a plan to pay off at least some of it.
What Happens When You Declare Bankruptcy
When you formally file for personal bankruptcy, you get what’s called an automatic stay. This “stay” means a block is applied to your debt to keep creditors from collecting. An automatic stay prevents creditors from taking further action, such as wage garnishment, deducting money from your bank account, or going after any of your secured assets.
To file, you generally need a lawyer, although there are ways around this. For instance, if you use the services that Fresh Start provides, our financial experts can help you navigate potentially complicated laws.
It seems ironic, but filing isn’t free. Costs vary by state, but it typically costs a few hundred dollars to file for Chapter 7 or 13, and companies fork over a few thousand dollars to file for Chapter 11. On top of this expense are the legal fees — sometimes these can run about 4% of a company’s annual revenue in the case of Chapter 11. Individuals can save themselves a significant amount of money in legal fees by using financial services from Fresh Start.
Credit Counseling and Courses
The federal government requires individuals to take a credit counseling class at least 180 days before you plan to file. Additionally, if you aim to get your debts discharged, you’re required to take a debtor education course.
A few weeks after formally filing, you typically attend a creditors meeting. This is a court meeting that includes you, your trustee and any creditors. During this meeting, creditors ask you questions about your financial situation to try to understand how you reached this point and your overall decision to file.
Does Your Property Get Liquidated With Chapter 7?
Typically, people who file for Chapter 7 don’t have to liquidate their assets, unless they’re collateral for a secured debt. Most assets fall under the category of being exempt or are deemed too difficult to sell to raise money for creditors.
The liquidation of assets and other rules will be worked out at your creditors’ meeting.
Chapter 13 Payment Plans
If you file for Chapter 13, you enter into a payment plan to pay off your debts. Some of them are classified as priority debts and have to be paid off in full over time. Priority debts include things such as taxes, child support, alimony and any wages you owe to employees.
Payment plans are based on several factors, including your income and how much you owe. With these considerations in mind, the court will determine your monthly payment amount and the length of time your payments will occur.
Bankruptcy and the Hit to Your Credit
Make no mistake: Your credit score takes a nosedive when you declare bankruptcy. For example, someone whose credit score is in the 700s might drop by 100 points after completing a claim. A low credit score can make your financial life more challenging in many ways. It can be tough to get a loan for anything, including a car or home, and applying for a lease on an apartment, for example, may also be more challenging.
How long does this stay on your credit report?
A personal bankruptcy stays on your credit report for 10 years, but its impacts do fade with time. Rebuilding your credit after filing isn’t a walk in the park, but it’s not impossible. Creating a budget to help you manage your finances and setting aside an emergency savings fund (even if it’s just a little bit per month) can help you get back on track.
Can you file without a lawyer?
You can file for bankruptcy without a lawyer, but most financial experts don’t recommend it. The rules and laws are often too complicated for the average individual to navigate without the help of an expert.
Instead, using the debt settlement services of a company such as Fresh Start can help you get back on your feet.
How often can you file?
While no one wants to think about filing more than once, life is unpredictable and messy, so sometimes you may need to more than once in your lifetime. Perhaps your debts weren’t fully resolved the first time around, or maybe you fell on more financial hard times after settling your first bankruptcy.
You can file as many times as you need to. However, you can only obtain a discharge of your debts in a new case if there was an adequate waiting period between filings.
This waiting period varies depending on your state, the type of bankruptcy you previously filed for and whether your previous case was approved or dismissed in court.
For example, if you previously filed for Chapter 7, you may have had some of your assets liquidated and debts discharged. If down the road you find yourself in a similar position, unable to repay delinquent debts, you’ll need to wait at least eight years before making another claim. These eight years are counted from your original filing date, not from the time when your debts were discharged.
What happens when bankruptcy is dismissed?
A bankruptcy dismissal closes your case. If this occurs before you’ve obtained a debt discharge, it means that your automatic stay is lifted, and you continue to be liable for your debts.
Creditors, debtors or trustees can all file a motion for dismissal. Just because these people ask for it, though, doesn’t mean the court grants it. The court’s ultimate decision depends on the reason for the dismissal request:
- whether you filed Chapter 7 or Chapter 13
- what stage of the process you’re at
- how this dismissal affects your creditors overall
Reasons for dismissal vary, ranging from fraud to failing to file the correct papers with the court.
Reasons for Bankruptcy Dismissal:
- Not accurately disclosing information
- Not attending required courses
- Failing to pay court filing fees or don’t attend
- Missing creditors’ meetings
Following proper procedures will help ensure this doesn’t happen.
Get Useful Debt Settlement Solutions With Fresh Start
The financial experts and consultants at Fresh Start are ready to assist you with filing for bankruptcy. If you are finding it impossible to pay off your debts and believe that this may be the only option left, Fresh Start can help. Our knowledgeable financial professionals are ready and willing to assist you. Take charge of your financial future today by contacting Fresh Start at 800-346-9559.