In a perfect world, we would all have enough money to pay our expenses and we’d never need to worry about debt. Unfortunately, we don’t live in a perfect world, and sometimes we need help to get our personal finances in order.
At Addition Financial, we work with our valued members every day to help them manage their finances and understand their options. One question that many of our members ask frequently is this one:
“What does it mean to declare bankruptcy?”
With that in mind, we’ve written this post to help you understand the basics and intricacies of bankruptcy, so you can decide if it’s something you want to pursue.
There are several reasons why a person might want to consider declaring bankruptcy. Here are some of the most common:
There are additional reasons to declare bankruptcy that are less common, such as inheriting property, moving to a state with less favorable bankruptcy exemptions or avoiding a lawsuit. However, the five reasons we have listed here are the most likely to apply to the average person.
There are a lot of misconceptions about bankruptcy and these include some confusion about the various types of bankruptcy. You should know that there are three different types of bankruptcy and each has its own rules and advantages.
Chapter 7 bankruptcy is sometimes referred to as straight bankruptcy because it is the most straightforward option. When you file for Chapter 7 bankruptcy, the process involves liquidating all your assets to pay as much of your outstanding debt as possible. A Chapter 7 filing will stay on your credit report for ten years.
Chapter 13 bankruptcy is also known as reorganization bankruptcy. This form of bankruptcy is ideal for individuals who have assets they want to keep. Unlike Chapter 7, a Chapter 13 filing requires repayment of some debt. The person filing must submit a repayment plan to the court and the court appoints a trustee to repay the debts. Typically, debt payments are spread out over a period of three to five years after which any remaining debt is discharged.There are limits on debt for Chapter 13 filings. You may not have more than $1,184,200 in secured debt and $394,725 in unsecured debt to qualify.
Of the three types of bankruptcy that may apply to individuals, Chapter 11 bankruptcy is the rarest. It is most commonly used by businesses in need of restructuring and like Chapter 13, it includes a debt repayment plan. An individual would only choose Chapter 11 under two circumstances. The first would involve real estate investment reorganization, and the second would involve reorganizing secured debts that are too high to qualify for Chapter 13.
If you’re considering the option of declaring bankruptcy, one of the biggest questions that may occupy your thoughts is about what happens once a bankruptcy declaration is filed.
Filing for bankruptcy initiates an automatic stay on debt collection. That means collection agencies and creditors may not contact you and your wages may not be garnished to pay your debts. It also means your creditors are prohibited from going after any secured assets, including your home and car. A bankruptcy filing provides immediate debt relief.
After your initial filing, the court will set up a creditors’ meeting for you, your bankruptcy attorney and your creditors to discuss repayment of your debts. The meeting may happen as soon as three weeks after your filing and must take place no more than 40 days after your filing. From there, it may take several months for your debts to be discharged.
The final thing you need to know about the bankruptcy process is that you will be required to take some classes. You will need to take a credit education course within 180 days before filing and you also need to take a debtor education class.
It’s important to note that there are some types of debt that may not be discharged through bankruptcy. You may discharge student loan debt, but only if you can prove to the government you have experienced hardship that qualifies you for debt relief. Tax debt may not be discharged under bankruptcy and the same is true of alimony, child support and other divorce-related debt.
One of the ironic things about filing for bankruptcy is that it’s not free. In most states, the fee is about $300 to $500 to file. You may want to hire a bankruptcy lawyer to help you navigate the ins and outs of filing and discharging your debts.
On average, hiring an attorney for Chapter 7 bankruptcy costs about $1,500, while the costs for a Chapter 13 bankruptcy average between $2,000 and $3,000.
For obvious reasons, a more complex filing with many outstanding debts may take longer and cost more than a simple filing. However, there is low-cost legal advice available if you need it.
If you’re considering bankruptcy – and particularly if you are being pursued by debt collectors – you may wonder how quickly you can file bankruptcy.
For a Chapter 7 filing, the process is simple. You will need to take a one-hour credit education course before you file. Once that happens, here’s the timeline:
In all, a Chapter 7 filing takes between four and six months. For a Chapter 13 filing, the process is different. It usually takes 95 days from the date of your filing to the date the repayment plan is approved. However, the bankruptcy won’t be discharged until the end of your three to five year repayment plan.
A low credit score can negatively impact your ability to buy a house or a car. While bankruptcy is a necessary remedy for many, there is no denying that a bankruptcy filing will lower your credit score substantially at first.
Filers with a credit score above 700 can expect to see their credit score fall by about 200 points after the filing. With a lower score of 680, you can still expect a decrease of somewhere between 130 and 150 points.
On the other side of bankruptcy, that is, when the bankruptcy falls off your credit report, you can expect a bounce of between 50 and 150 points. Keep in mind that a Chapter 7 filing will remain on your credit report for 10 years, while a Chapter 13 filing will be there for between three and five years or as soon as you complete your repayment schedule.
Filing for bankruptcy protection can provide relief from outstanding debt and financial strain. Depending on how much debt you have and how complicated your financial situation is, you may want to consider hiring a bankruptcy attorney to help you through the filing and debt discharge process.
Addition Financial is here to help if you need help managing your debt and understanding your options. Click here to check out our financial courses and tools!