When is Bankruptcy A Good Plan to Solve Your Debt Problems
If you are drowning in debt and have had trouble keeping up with payments then you may be considering bankruptcy. Filing for bankruptcy is designed to give people in deep financial trouble some relief and an opportunity to start over to help solve debt problems. By the time you reach the point of filing for bankruptcy, you may have tried other methods for managing debt that didn’t solve your debt problems.
Bankruptcy does have its benefits to solve your debt problems and does allow you to wipe the slate clean. However, there are a lot of things to consider before making the decision to file for bankruptcy, especially with the negative consequences. You should think carefully about some other options, like debt settlement. For many people, this is the last option and it does require some due diligence. It’s important to not take filing for bankruptcy lightly.
Basics of Bankruptcy
Bankruptcy is a legal procedure in order to discharge debt brought up by someone who isn’t able to repay those debts or doesn’t have the means to repay debts. There are two different forms of bankruptcy to solve your debt problems.
Chapter 7 bankruptcy is when your nonexempt assets are sold off and proceeds are then used to pay the debts. Before filing for Chapter 7 bankruptcy, you will need to pass a means test.
Chapter 13 bankruptcy is considered a wage earners plan. In order to qualify, you need to have a steady income to allow you to pay back debts with a repayment plan. A repayment plan will last between three and five years.
In many cases, bankruptcy won’t protect you from any future debts you incur. A bankruptcy will have an effect on your credit score and it remains on a report for seven to 10 years, depending on which type of bankruptcy you file. With Chapter 7 bankruptcy, you might lose assets, such as your car or house, depending on the amount of equity you have or if you are exempt.
Are You Eligible to File for Bankruptcy?
Either type of bankruptcy can be beneficial and help solve your debt problems depending on your specific situation. The first question you need to ask is whether or not you can qualify for either one and each one has its own criteria.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy has a means test, and this is to make sure that only people who aren’t truly able to afford debts are allowed to file. There are two main ways to pass and qualify for this type of bankruptcy. If monthly income is less than the median monthly income for your family size and your state, you will qualify. If you don’t pass this first step then there is a complex calculation to see if your disposable income is enough to satisfy debt obligations. If you have reached this stage, you may want to talk to a professional who can help you with the process.
Chapter 13 Bankruptcy
Eligibility requirements for Chapter 13 bankruptcy are more straightforward. You do need to show that your disposable income is high enough to be able to afford a repayment plan. Your secured debt, such as your auto loan and mortgage, can’t exceed $1,149,525 and unsecured debt can’t exceed $383,175. You will also need to have filed both your state and federal income taxes for the last four years.
There are also some other requirements for each of these but those are the main ones.
The kinds of assets and liabilities you have will play a role. Depending on your financial situation and how you want to solve your debt problems, one type may be more beneficial than the other, or it could be that neither will be all that helpful. For example, neither type of bankruptcy is going to help you that much if most of your debt is from student loans. These loans can’t be discharged with Chapter 7 bankruptcy. While requirement payments could be reduced over the repayment plan with Chapter 13, once the repayment plan is over you still have to continue paying that back. If you are going through Chapter 7 bankruptcy then the type of assets you have and the value also matter.
During the process, the bankruptcy trustee can sell your property to settle debts but the certain property is protected. For example, your car and house are protected to certain limits. An employer retirement account is also fully protected. Accounts such as savings, checking, and investment accounts don’t have the same protections. The rules vary by state but knowing which assets you can keep and which ones you could end up losing may play a role in your decision to file.
When to File for Bankruptcy?
If you are going to file for bankruptcy, it needs to make sense and be worth your while. It should give you relief from debt and help you make sure that you are not going to get in a similar situation in the future. If you have major expenses that you are about to incur, you should probably wait to file until after so that they can be included in the bankruptcy settlement. This is important if the reason you are filing is because of medical bills.
With Chapter 13 bankruptcy, you can seek court approval to include any new debts you have incurred after filing to be part of the payment plan. There are certain aspects of your financial situation that means it could be time to consider bankruptcy. If you aren’t able to pay your bills and you don’t see this changing any time soon while your debt just continues to pile up then bankruptcy may be your only option.
Debt Collectors Are Calling
If you are so behind on your bills that debt collectors are calling then it could be time for bankruptcy. This is especially true if debt collectors are suing you.
You Are in Danger of Losing Your Home
If you are risking foreclosure and losing your home then filing for bankruptcy can help you get caught up on payments and keep your home. If you file for Chapter 13 bankruptcy, you get the chance to keep the home by creating a plan to repay the outstanding debt.
You Are Using Loans to Pay Bills
Using short-term high-interest loans, such as payday loans, will likely get you in trouble. With these loans, you are borrowing against your paycheck. It’s easy to get caught up in the trap and then it starts going from paycheck to paycheck. Title loans are another loan option that can be problematic for someone already in financial trouble and drowning in debt.
You Are Liquidating Retirement Assets
Your retirement assets are exempt in bankruptcy and trustees aren’t able to use them to repay lenders. In many cases, it doesn't make sense to burn through retirement money to pay off your debts.
How to File for Bankruptcy?
Many initial meetings with a lawyer are free. At this meeting, you will talk about your financial situation and your reasons for wanting to go with bankruptcy. While there are ways to file for bankruptcy on your own, bankruptcy judges and court employees aren’t allowed to give you legal advice so if you choose this, you are on your own. Unless you have a strong understanding of the legal issues, as well as the time it takes to file the paperwork, then it’s best to use a lawyer. Making a mistake can impact your rights.
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Steps to Filling for Chapter 7 and Chapter 13 Bankruptcy
Filing for Chapter 7 bankruptcy is the most common and involves the sale of your assets. The first step in the process to file this bankruptcy is to take mandatory credit and debt management counseling from a government-approved organization. After you have completed this, you can decide if you still think you should move forward with bankruptcy. Then the attorney or you file the petition and additional forms with the court. After this is done, you are subject to the means test. A trustee is appointed to review paperwork and take nonexempt property. The next step would be to meet with creditors. This is known as a “341 meeting.” At this meeting, you answer questions about your finances. Creditors are allowed to attend this meeting if they want to. When it’s decided that you are eligible to file, secured debts are determined and they can be repossessed by the creditor. You then have to attend another course where you learn information about creating a budget, using credit, and managing your money. Then your debt is discharged. You need to pay your fees upfront. It can usually be a flat-rate fee but can also be dependent on the complexity of your debt and the market you are in.
The proceedings for Chapter 13 bankruptcy will last about three to five years. The processes are complex and long so it’s recommended that you get a lawyer. The first step is taking a credit counseling course. After this, your attorney prepares and files the petition and the paperwork. The court later appoints a trustee to administer the case. You begin making payments about a month after you file the paperwork. You also need to attend a 341 meeting. Creditors will file a proof of claim that they are able to get repaid and you can object to the claim if you don’t think it’s fair. The repayment period then starts when you comply with the plan's payments and requirements. This is the longest point. If it’s required by your plan, you also need to submit documents to the court. Just like with Chapter 7, you need to attend another course to go over managing money. There are two different ways an attorney can charge you for helping you with Chapter 13 bankruptcy. It can be a flat fee set up depending on your state, or they can bill you hourly. The payment to your attorney can be worked into the repayment plan.
Benefits of Chapter 7 Bankruptcy
If you are looking at Chapter 7 bankruptcy to help solve your debt problems, there are some advantages.
It Doesn’t Involve Your Future Income
The court is going to evaluate your income for a period of six months before your bankruptcy is filed. Anything made after that point isn't included in the bankruptcy estate.
There Are No Complex Reports to Worry About
If you file under Chapter 13, the process will require monthly payments but Chapter 7 doesn’t require any payments or monthly income statements.
You Rarely Will Have to See a Bankruptcy Judge
A majority of Chapter 7 cases don’t require an actual court appearance. A meeting with a bankruptcy trustee is necessary during the process but many individuals can avoid spending time in court.
You Get a Fresh Start
In this moment, you need a good debt management plan. All valid debts will be erased so you can start over with new accounts. It will remain on your credit report for 10 years but you are able to start building your credit rating. You can begin slowly with high-interest loans in order to show that you are capable of the responsibility. While there is no set time that your credit score will increase again, it helps to note that if you are dragging debt out and avoiding bankruptcy then it will only deteriorate your credit further.
You Can Still Keep Some Assets
In some cases, you get to keep some of your assets but it will all depend on your unique situation.
The Process Is Fast
Chapter 7 bankruptcy can take as little as three to five months. You can put the agonizing debt to an end pretty quickly.
Benefits of Chapter 13 Bankruptcy
If Chapter 7 isn’t going to work for you, there are some benefits of Chapter 13 that may help you solve your debt problems.
Helps with Foreclosure
This is the most common benefit of Chapter 13. It doesn't give you a free house and you still have to pay the mortgage but it can prevent the lender from foreclosing.
Allows You to Pay What You Can Afford
It allows you to make one monthly payment to the trustee to cover your debt. The payment is determined by your budget.
Helps with IRS Problems
A lesser-known benefit of Chapter 13 bankruptcy is that it can help with resolving your IRS problems.
Why Hire an Attorney for Bankruptcy?
If you are hoping to solve your debt problems then you may not want the added cost of hiring an attorney to help with your bankruptcy filings. However, there are a number of reasons why the cost of an attorney is worth it.
Bankruptcy Planning
A lawyer can help you determine if bankruptcy is the best way to solve your debt problems. If it is the best option then he or she can help you decide what type of bankruptcy to file. Both Chapter 7 and Chapter 13 have different purposes and an attorney can consider your needs and wants and recommend the right course of action.
Preparation
A lawyer can help you apply the means test and set value to your property. Each state has separate exemption systems and the attorney can understand how to use the exemption rules in order to save as much of your assets as possible. Your attorney can also help you determine which debts are discharged and which ones you still have to pay for.
During the Process
During the process, your lawyer can guide you through the bankruptcy case and the steps you must take. He or she can also help you with the paperwork, which can be excessive since you will need to file pages of financial data about income, expenses, assets, and debts. Lawyers know what you must disclose, what constitutes income, and how to value your assets, among other important things. If there are issues with creditors, lawyers can also step in when necessary.
After Bankruptcy
A lawyer is good at making sure the case gets processed smoothly so you can take advantage of your fresh start. Your attorney can help with any post-bankruptcy discharge violations or if there are things that need some attention.
Ways to Pay Bankruptcy Fees
If you are looking into bankruptcy to solve your debt problems, you could be overwhelmed by the fees. There are things you can do to reduce the cost.
When you file under chapter 7, it’s possible to ask the court if you can pay the fee in installments. You can also ask to waive the filing fee and apply for a waiver. You may need to find a lawyer who will work pro bono and some attorneys have dedicated a certain number of hours to helping individuals who aren’t able to afford the services.
You can also get in contact with legal aid since these offices give free legal advice to individuals with low incomes. If you qualify, you may be represented for free. If you don’t qualify for assistance and you aren’t able to raise the money on your own then you may consider asking friends and family for help.
Conclusion
Filing for bankruptcy can be a big decision to solve your debt problems. It can be a long process and an emotional one if you are trying to discharge debts. Be sure to do your research, evaluate your options, and then make a decision that helps you reach your financial goals. Looking into your options sooner rather than later will help you lose less in the long term and prepare for a better financial future.