Filing for bankruptcy?
There’s a lot you need to learn before you start!
Sometimes it makes financial sense to file for bankruptcy. It can even be a good back-door when you can’t afford to fix your credit. But, there’s no denying that bankruptcy can kill your credit rating.
If you think bankruptcy is the right choice, it’s time to learn everything. That starts with figuring out what type of bankruptcy is right for you.
Types of Bankruptcy
- Chapter 7 – an asset liquidation for businesses and individuals.
- Chapter 9 – a municipal bankruptcy, that’s available for federal protection.
- Chapter 11 – a rehabilitation, primarily for high-debt, insolvent businesses.
- Chapter 12 – a rehabilitation for farming and fishing families.
- Chapter 13 – a rehabilitation for debtors with a solid source of income, serving as a way to consolidate bad and risky debts.
- Chapter 15 – an international bankruptcy, giving filers the chance to discharge foreign debts.
Which Bankruptcy Types Are Most Common?
Most personal borrowers will resort to either chapter 7 or 13 bankruptcy. These are the two options that relieve individual debtors from a financial crisis. Chapter 7 gives the borrower the ability to become free of all debts, while Chapter 13 makes it possible to dig out of debt without giving up.
Reports show that nearly two thirds of debtors go for Chapter 7 bankruptcy. This is the traditional style of bankruptcy, clearing a debtor from all financial wrongdoing. It’s the “escape” that debtors look for when facing a load too heavy to clear in the foreseeable future. When there is no other plan, anyone can turn to Chapter 7 bankruptcy as a “way out” and get a chance at a fresh start.
Yet, many still turn to Chapter 13 bankruptcy to avoid liquidating certain valuable assets. This is effective when trying to keep a home or vehicle. But, you need to know you can pay off the debts. You must consider whether you are over-extending financially to keep your assets. Also, if your primary focus is building credit, there might be more interest in rehabilitating on current debt. This reduces credit damage, as successful Chapter 13 bankruptcies look better than straight-up bankruptcies.
What Type of Bankruptcy Fixes Your Problems?
You must always think about which type of bankruptcy will resolve your issues. The answer is obvious for most, as it comes down to the amount of debt held. Yet, the ability to maintain asset ownership while repaying debts is attractive. Bankruptcy filers must consider each of the options thoroughly, as the decision affects you for years to come.
Debtors go for Chapter 7 bankruptcy to:
- Clear any debts that are too far off from repayment.
- Get a head start at a fresh start, without the financial distress.
- Cover major debts from non-assets, such as gambling debts.
Debtors go for Chapter 13 bankruptcy to:
- Keep equitable, useful assets that otherwise end up in liquidation.
- Avoid having to move, from the court ordering the foreclosure of your home.
- Force your auto or mortgage lender to make modifications to the loan terms.
Did you fall behind on house payments? – Chapter 13!
The main reason for Chapter 13 bankruptcy is to keep your home. This type of bankruptcy allows you to spend at least three years trying to save your home from foreclosure. This is the perfect solution for anyone who falls behind on house payments. This can happen for any number of reasons, such as an unexpected medical expense or home repair.
Did you run a $100,000 non-secured gambling debt? – Chapter 7!
The main reason for Chapter 7 bankruptcy is to clear the debts for any non-ownable assets. It’s a way to remove the amount you owe to any creditor. You take away the financial responsibility for all your purchasing from previous credit lines. This is great if you aren’t worried about giving up your home or vehicle. Within 10 years, your bankruptcy claim will drop off your credit report and you will have great credit again. If the debt is so large, you just can’t pay it all off, then this becomes the only option.
Deciding the Bankruptcy Type is Easy!
For personal bankruptcy cases, most fall under the Chapter 7 and Chapter 13 categories. These are two different types of bankruptcy, which contrast in many ways. You can tell by the description of each, that only one of the two are beneficial to you. It’s just a matter of taking the time to decide which type of bankruptcy you need.
Once you make your decision, it’s time to get things underway!
Making the Most of Chapter 7 Bankruptcy
Each type of bankruptcy is effective in it’s own right. Yet, it’s important any debtor figures out whether Chapter 7 or Chapter 13 is the way to go. The decision comes down to the little details, such as whether you are trying to keep your home or vehicle.
But, there are some loopholes you can use along the way. For example, it’s still possible to keep your home while filing for Chapter 7 bankruptcy. It’s merely a matter of not having enough equity in the home for there to be a value in trying to liquidate.
Now, let’s look a little further at Chapter 7 bankruptcy and understand how you can use it to your advantage.
The Pre-Filing Process
Before filing for bankruptcy, it’s important to make sure you qualify. Chapter 7 bankruptcy eligibility bases off your income. It factors the average income for same-size families in your area. For non-qualifying applicants, a Chapter 13 bankruptcy is still an option.
To qualify for Chapter 7 bankruptcy, you must:
- Pass an eligibility “means test,” or qualify for an exclusion,
- Make too little or owe too much to justify an easy repayment,
- Pass a credit counseling and debtor education course, and,
- Not have a bankruptcy discharge in the last eight years.
Now, you need to discuss your financial situation with a bankruptcy lawyer. This person will be able to confirm that Chapter 7 is your best option. Your bankruptcy attorney will also be able to walk you through the filing process. And, you will have a walking hand through completing the claim and discharging your debts.
Before filing, you must go through a credit counseling program. Visit www.Justice.gov to find an attorney-approved agency for your credit counseling course. Your bankruptcy claim will undergo dismissal if you don’t complete the credit counseling process.
The Filing Process
Then comes the paperwork…
- Bankruptcy petition
- Debtor profile
- Recent tax returns
- Income documentation
- Identity proof
- Payment proof
- Bank and retirement account statements
- Real estate ownership / valuation
- Vehicle ownership / valuation
That’s just a scratch at the surface. More forms will follow, but most you can fill out with information from the above list.
Then, you might have to supply other information at the request of your attorney. The creditor’s meeting will run roughly 20 to 40 days after you file a petition with the bankruptcy court. In almost all cases, you will need to attend the meeting as no one will be there to represent you.
The Follow Up
To appease the court, you must finish a personal financing management program. Proof of completion is due within the first 45 days after filing the petition.
Now comes the waiting game. You can expect it to take at least 61 days to get a reply. The correspondence back is usually the final decision. An appeal system is in place, but few see successful results when attempting to appeal a bankruptcy rejection.
You must meet all post-bankruptcy requirements. The court will set specific financial criteria for you to follow. This includes paying the bankruptcy premiums, and keeping up on any non-liquidatable debts. There are few that qualify, and the ones that do are not as impacting on your credit score. This includes your student loan, tax bills, or crime-related penalties. Of course, your child support obligations remain intact after filing bankruptcy.
Making the Most of Chapter 13 Bankruptcy
Clearing all your financial commitments might not be your goal. You could be someone who just got stuck in a financial position, yet you have the responsibility to fix it. You might also be a homeowner or vehicle owner, and you probably don’t want to give up your assets.
Chapter 13 bankruptcy is the perfect solution. The only problem, you need to be certain you can start repaying your debts the right way. This type of bankruptcy requires you to follow a financial plan for three to five years. The great thing is you get to propose the plan, so you have control. The creditor can either accept or reject, but holds no right to change or propose terms.
The Pre-Filing Process
First, you must make sure you are eligible for Chapter 13 bankruptcy. This is a type of bankruptcy that addresses personal finance issues. It’s made to help Americans avoid straight-up bankruptcy and asset forfeiture.
To qualify for Chapter 13 bankruptcy, you must:
- Pass an eligibility “means test,”
- Be an individual, not a business,
- Be up to date with filing your taxes,
- Not have a bankruptcy discharge in the last six years,
- Have enough income to support a repayment plan, and,
- Have under the maximum for secured and unsecured debts.
You must not hold over $1,149,525 in secured debts, and $383,175 in unsecured debts. This number is accurate as of 2015, but adjusts for inflation every year.
Now, you need to speak with a bankruptcy attorney about your situation. This person will confirm whether Chapter 13 bankruptcy will work for you. The attorney can also discuss all the steps necessary to see it through. Further, this person can answer any of your credit-related questions.
Before you file, it’s important to complete a credit counseling course. You can find attorney-approved agencies that offer these courses on the www.Justice.gov website. Without further review, the court will dismiss your petition if you don’t complete the course and show proof. But, the financial management program is only necessary for individual applicants. Businesses filing for Chapter 13 bankruptcy do not need to complete this program.
The Filing Process
Then comes the paperwork, which compares to what you need for filing for Chapter 7 bankruptcy. You must file a petition, show your assets and debts, including exemptions, and prove your identity.
Further, you must show proof of payment and successful completion for the necessary courses. You will then have to bring your income tax return to the creditor’s meeting.
The Follow Up
Chapter 13 bankruptcy runs for three to five years. During this time, you must follow a repayment program. This is a plan you and the court work out, so keeping on track should not be an issue.
After you file for Chapter 13 bankruptcy, you have 15 days to supply the court with a repayment proposal. Within 30 days of filing, you must make payments on your secured debts and to the bankruptcy trustee. You must also pay any lessors of your personal property. By 60 days after filing, you must give supporting evidence to the property lessors.
Before filing the creditor’s meeting, it’s important to have at least the last four years of taxes up to date. Between 20 and 50 days of filing for bankruptcy, your mandatory creditor’s meeting will take place.
You must then go to the confirmation hearing. This is 20 to 45 days following the creditor’s meeting, but some courts extend the deadline. You then have until the deadline of the repayment plan to come good on your debts.
Once you clear the amounts owing, the court will issue a discharge on all your debts. A “hardship discharge” can occur if you are not able to cover what you owe. This only applies if there is a reason outside of your control. And, it still requires at least the minimum for a Chapter 7 in repayment to the creditors. But, you can request debt discharge before the three to five years is up, supposing you pay off all the debts early.
Get Debt-Free, Credit-Healthy, and Keep Your House!
Bankruptcy is both a blessing and a curse. It’s a Godsend for those that apply it for the right uses. For example, to save your family from having to move due to falling behind on mortgage payments. The only downfall is the staggering effect it has on your credit report. Both Chapter 7 and 13 bankruptcy remain on your report for 10 years. And, it still takes seven years to drop a successful Chapter 13 bankruptcy.
FICO reports that a bankruptcy can impact your credit score by as much as 240 points. This goes by a 2010 example, where FICO gave an example of a 780 FICO score dropping to 540 after the debtor went bankrupt. The same findings make it appear that the chapter of bankruptcy won’t have a major impact on the amount your credit rating drops.
Yet, you must remember that Chapter 13 bankruptcy allows you to rebuild your credit better, and faster. You have the ability to repay your current debts in a short window, under reasonable terms, and then start over. Chapter 7 bankruptcy leaves you waiting longer to qualify for almost any type of credit. Plus, the positive impact on your credit report will be worth it once you finish the Chapter 13 bankruptcy. This is because the court will discharge all your debts, giving you a quick start towards a healthy credit report.
Bankruptcy is not always the answer, but it’s definitely the best back-up plan. If you are considering this as your “way out” it’s important you weigh your options. Sometimes it’s easier to repay debt than you think. If that’s an option, do it, as your previous delinquencies are not as harmful as a bankruptcy claim. Only turn to bankruptcy if you really need it, but never shake it off as an option, as the results are impressive when it’s done right.