The Truth About Bankruptcy
If you feel completely overwhelmed by debt, you may think personal bankruptcy is your only option. However, declaring bankruptcy is a big, life-altering step with long-lasting consequences. Before you declare bankruptcy, make sure you know all of the facts to ensure it’s the right option for your financial situation.
What is Bankruptcy?
Bankruptcy is a legal option for those struggling with debt in which the debt is evaluated by a court. The court examines a person’s assets and liabilities and then decides whether or not they’ll remain responsible for the debt they owe. If the court determines that the person can’t pay their debt, the outstanding balances are discharged and the individual is no longer legally required to repay the money they owe.
There are two types of personal bankruptcy. Chapter 7, the most commonly filed-for type, does not involve creating a repayment plan. Instead, a bankruptcy trustee gathers and sells all of the declarer’s non-exempt assets and uses the profit from those sales to pay back the debt owed. People often view Chapter 7 bankruptcy as a way to wipe the slate clean and start over. In a way, this is accurate, as it allows those who’s financial situation has gotten out of hand to climb out from under the debt they owe. However, the declarer’s slate isn’t necessarily clean, as it will have bankruptcy on it.
Chapter 13 bankruptcy is commonly referred to as “The Wage Earner’s Plan” or reorganization bankruptcy. It allows an individual declaring bankruptcy to develop a plan to repay their debts over the next three to five years. Anyone applying for chapter 13 bankruptcy must have a steady, regular income. Chapter 13 bankruptcy is an option for those who may not qualify for chapter 7 bankruptcy because their income is too high.
When Should You File for Bankruptcy?
You should put a lot of thought into filing for bankruptcy, but generally, if you owe more than you can afford to pay, you may have no other choice. If you don’t know how much you owe, can’t afford necessities, much less to pay off any debt, or are consistently only making minimum payments on your credit cards, bankruptcy may be a good option for you. When your debt feels out of control and you’re afraid to even look at your finances or answer your phone, bankruptcy can be the lifeline you need to get back on track. Bankruptcy was developed as a legal relief for those who face impossibly high emergency medical bills or other unexpected expenses that have gotten out of control.
Bankruptcy does not relieve all debt. For instance, school loans, alimony, child support, or debt incurred from driving while intoxicated will not be wiped away by bankruptcy. These debts must be paid. However, chapter 13 bankruptcy can give you a chance to reorganize all of these debts and develop a more effective payment plan.
Before you file for bankruptcy, consider if any of your debt was cosigned for. If it was, declaring bankruptcy will not alleviate the debt from your cosigner. They will still be responsible for paying back what’s owed.
The Consequences of Bankruptcy
The positive effects of filing for bankruptcy are the discharge of your debt and the granting of an automatic stay. As soon as you file, an automatic stay is put into place to prevent creditors from contacting you to collect your debts. If the court and court trustee determine that you can’t pay your debts, all applicable debts will be discharged.
The negative consequences of bankruptcy are extensive. The obvious negative consequence of bankruptcy is the impact on your credit score. Once you’ve declared, your credit score will drop to its lowest possible point. Bankruptcy remains on your credit report for ten years, and can make it very difficult to take out a loan or get a credit card. You won’t be able to get a mortgage for one to four years after you’ve declared bankruptcy. However, though your credit score will be in the “very poor” range, you’ll be able to start building your credit back up immediately, as you will no longer be responsible for making payments on your debt. You’ll be free to begin making on-time payments to rebuild your credit.
You may also lose some of your assets once you file for bankruptcy. If your property is not considered exempt, the court trustee may sell it to help pay back your creditors. In most cases, all property is considered exempt, but this consequence is worth being aware of.
When you file for bankruptcy, everything
brought up in court, including your financial records, becomes part of the
public domain and can be accessed by anyone at any time. Your debts and assets
will be visible to anyone in the public who decides to look. However, you don’t
have to worry about information going public that will put you or your identity
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