Types of Personal Bankruptcy: When and How to File
Bankruptcy is such a big and nasty-sounding word often associated with ruin. We usually hear about it in the media in connection with some seemingly invincible big corporation. Or as part of celebrity gossip over which former star is a few dollars away from the poor house.
Maybe your personal financial position has become precarious. The collection calls have increasingly become incessant. You may have started to sell your stuff to meet up with payments. You have slashed all your expenses. But you are still deeply in debt and personal bankruptcy looms threateningly in your horizon.
Understandably, you are scared and confused. Bankruptcy can be a complex process and at the same time emotionally devastating. There’s a stigma attached to bankruptcy as well which you have to deal with. And then the aftermath: how would you fare with such a stigma over your head?
Bankruptcy is such a serious, life-changing decision and must be considered carefully. Learning all you can about the ominous subject will let you decide if it’s your best option towards a life free of debt. You will also be better equipped to take the plunge if it’s the only way out. Before you take the leap, here are the key things you should know about bankruptcy.
What is Bankruptcy?
Bankruptcy is a legal term for when an individual or business is unable to repay their outstanding debts. The bankruptcy process is usually initiated by a petition filed by the debtor. In some instances, though uncommon, the petition can be filed on behalf of the creditors.
The court assesses and evaluates all the debtor’s assets, which may be used to repay a part of the outstanding debt.
Bankruptcy gives you an opportunity for a fresh start by writing-off debts that cannot be repaid.
At the same time, it gives the creditors some chance of getting some repayment from the liquidation of your available assets. Once the bankruptcy proceedings are completed successfully, you are relieved of all debt incurred before filing for personal bankruptcy.
2 Types of Personal Bankruptcy
Here in the United States, bankruptcy filings for individuals fall under two categories – Chapter 7 and Chapter 13. But the filing specifications may vary from state to state, which may lead to some discrepancies in filing fees.
Chapter 7 of the Bankruptcy Code releases individuals from debt. When filing for bankruptcy under Chapter 7, you either repay or relinquish your properties for secured debts. You give up your non-exempt properties to pay off as much of your debt as possible. You get to keep all your exempt property, and you’re forever released from any obligation to repay the outstanding debts
For you to be eligible to file a Chapter 7 bankruptcy, it must be established that you do not earn sufficient income to repay some parts of the debt at least. There is a mathematical formula to calculate this, and there’s also a form for making the calculations. If the calculations show that you have enough income, you will then have to file under Chapter 13 rather than Chapter 7.
Unlike Chapter 7, Chapter 13 bankruptcy does not get rid of all your debt. You file bankruptcy under Chapter 13 to either restructure your repayments so you can better manage them with your income in mind or be discharged of a part of the loan to make repayments more manageable.
One way of doing this is by spreading the repayment over a longer period. You can also repay only a part of the loan. The idea is to reduce your monthly repayments to a more manageable amount. This type of repayment plan can last up to five years. And within that period, your finances will be under the scrutiny of the court-appointed trustee
The trustee and the judge will only accept your payment plans if they see that the creditors are treated fairly. And secondly, if each creditor receives at least as much as they would have received under the traditional Chapter 7 bankruptcy.
Under Chapter 13, you may spend a lot of time negotiating with the creditors as they would want better repayment terms. They may want to get more money out of you or try to get it faster. Your payment proposal does not have to be agreed to by the creditors. But it is easier for the judges and trustee to accept your plan if they do. Even if the creditors reject your payment plan, the judge may approve so long as deems the plan to be fair and treats all creditors equally. And as long as each creditor gets at least as much as they would have gotten under Chapter 7 bankruptcy.
Who Should File for Bankruptcy?
Anyone, in general terms, can file for bankruptcy. But it takes other considerations for someone to qualify for a particular type of bankruptcy. Bankruptcy is for honest people who genuinely can’t afford to pay their bills. However, if you have earlier filed for bankruptcy, it may be difficult for you to file again. For instance, you can’t file another Chapter 7 bankruptcy for another eight years from the time of your first filing.
Bankruptcy is designed as a way out for the honest debtor with more debt than they can pay. Therefore, you cannot file bankruptcy with the sole aim of defrauding your creditors. Or if you are in a financial mess, you cannot deliberately borrow large sums with the intention of filing for bankruptcy when the time comes to payback.
The entire process is documented and recorded. Personal tax returns, a certificate of attendance at a compulsory credit counseling class and proof of your income in the six months before filing are some of the record requirements for filing bankruptcy.
When Should You File for Bankruptcy?
Filing for personal bankruptcy literally destroys your credit score and makes it hard for you to borrow again. That is why there’s some stigma attached to it. It usually takes from 7 to 10 years for the bankruptcy records to be removed from your credit report. Although most loan applications will ask if you have ever filed for bankruptcy. Answering in the negative when you have filed is a fraud, and you may be liable for prosecution.
Bankruptcy is an extreme measure and should be considered only as a last resort. It’s better to find a way to pay your debts than to file for bankruptcy. A bankruptcy can affect you emotionally and ruin your personal life. Therefore, before initiating the bankruptcy process, you have to weigh all alternative options and consider the following carefully:
Negotiating with Your Creditors
Most creditors would prefer a debt settlement arrangement rather than have the debt discharged in a bankruptcy. They may agree to lower the interest, the outstanding amount, or the duration to make it easier for you to pay. If you are current with your payments, they may not see any reason to settle for a lower payment.
Seeking Credit Counselling
If you don’t make much progress negotiation with the creditors, you can get a credit counselor to assist. They are experienced and know the right things to say to reduce your interest rates and monthly repayments. Even If you want to proceed with filing, bankruptcy laws stipulate that you must get credit counseling for six months before you can file for bankruptcy. So you may as well get one. Possibly, they may be able to help you avert filing for bankruptcy.
Are Your Wages Garnished?
Here is a reason to file for bankruptcy. If your lenders have obtained a judgment against you and garnish your wages, filing for bankruptcy could stop the garnishment and even help you get some of the garnished money returned to you.
Do You Have Any Savings?
You are required to list all your assets when you file for bankruptcy. While some classes of assets are such child support, alimony, and specific public benefits are protected, normal savings are not. Therefore, you may consider filing for bankruptcy if you do not have any savings which you could use to pay the debt.
Do You Have Medical Bills Not Covered by Insurance?
Medical bills are right at the top of the list of leading causes of bankruptcy. The reason is simple: sometimes, people can’t afford them even with health insurance. Bankruptcy can relieve you from the soul-crushing weight of medical debts either by discharging them totally or by negotiating a 3- to a 5-year repayment plan.
Do You Have Assets?
Consider filing for bankruptcy if all you own is a set of matching throw pillows. On the other hand, if you do have assets that are held as security for loans such as a house or a car, filing for bankruptcy may keep you from losing them.
Get an Attorney
If you are seriously considering bankruptcy, get in touch with a consumer law attorney to talk about your options. An attorney has the necessary expertise to review your particular situation and know if bankruptcy is the best option for you.
How Do You File for Personal Bankruptcy?
The entire process of filing for personal bankruptcy takes an average of four to six months.
Here are the procedures which may vary in details depending on your particular situation.
- Once you are committed to filing for bankruptcy, the first thing to do is to attend the mandatory credit counseling course at an approved facility. You’ll be given a certificate afterward which forms part of the bankruptcy documentation.
- You then prepare and draft relevant paperwork with your attorney.
- Provide proof of your income for the past six months to determine eligibility.
- Determine which of your assets will be safe in a bankruptcy.
- File paperwork with the bankruptcy court.
- Attend a short meeting with the United States Trustee.
- Attend a post-filing personal finance management class.
- Receive a final discharge of debts from the bankruptcy court.
Deciding to file for personal bankruptcy is never easy. But bankruptcy is not the end of the world. And you are not the only one – almost 1.5 million Americans file personal bankruptcies every year.
Filing for bankruptcy in some cases may be the only way for you to get a fresh financial start. However, before you take this bold step to free yourself of debt, it’s essential that you know what you are getting into. This knowledge will help reduce your anxiety and help you get the best out of the process.