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Filing bankruptcy is a difficult step for many people but can be the best course of action. The disadvantages of filing bankruptcy are often over stated, particularly when comparing with its benefits. When thinking about filing the mindset should be, “is this best for me financially?”
A Chapter 7 Bankruptcy is a filing that permits the debtor to have a discharge of their debt. This means they no longer have a personal obligation to pay back that debt to the creditors. However, if a debtor does have a car or home they will have to continue to pay those debts to retain that property. This filing is available only to those who have an income below a certain local standard set by the Court
Chapter 13 Bankruptcy is a structured repayment plan of debt for a period of either 3 or 5 years. Over that time period the debtor pays a bankruptcy payment which goes to their creditors to whom they owe money. Chapter 13 is generally filed for two reasons. First, the debtor has more income than is allowed to file a Chapter 7. Second, to use bankruptcy to make up missed payments on a home or car loan. Making up on those missed payments will get you current so that you can keep your property.
The bankruptcy paperwork that is filed with the Bankruptcy Court is over 50 pages long. Bankruptcy is complicated enough that it is recommended to use an attorney to help you through it. First, meet with an attorney to understand what your obligations will be and to provide your financial information. In the paperwork you will identify your assets, debts, income, and other personal information. With this information you will either decide to file a Chapter 7 Bankruptcy or a Chapter 13 Bankruptcy.
Once you are ready to file your case, you must do what is call a “credit counseling course”. It is an hour-long course required by the Bankruptcy Court that explains bankruptcy and go over credit and budgeting basics. This course must be completed prior to filing.
After your case is filed you must also complete the required hour-long course on “personal financial management”. After your case is filed you will have to attend a 341 meeting of creditors, about 3-6 weeks after the filing date. This hearing is with the bankruptcy trustee who oversees cases on behalf of the government. Their job is to ensure the integrity of the bankruptcy process by checking that your paperwork matches the reality of your situation and no fraud is occurring.
If you are in a Chapter 7 bankruptcy, your case will then remain open for 90 days after the hearing to allow for any objections. Once that period is over, and no objections are filed, you will obtain a discharge of bankruptcy.
If you are in a Chapter 13 bankruptcy you will being making your monthly payments to the Trustee. These payments are made over a period of either 3 or 5 years. If you make all your payments, you will receive the discharge of bankruptcy.
Bankruptcy has three main benefits. First, it can take care of your unsecured debts. Unsecured debts are credit cards, medical bills, and pay day loans. Often these debts become problems because the interest rates are so high, that it becomes impossible to pay them down. Bankruptcy can eliminate or minimize the money owed to those creditors.
Second, bankruptcy can stop a foreclosure on a home or a repossession of a house. By filing bankruptcy, you benefit from the “automatic stay of bankruptcy” stopping all collection efforts while your case is before the Bankruptcy Court. You can then set up a plan with your attorney to repay the missed payments on those secured loans to get current on either your home or car payments.
Finally, bankruptcy can help fix your credit score. Credit scores are usually bad when someone has lots of debt and those debts have missed payments. The biggest factors in a credit score are your credit limits, credit usage, and payment history. When you get the discharge of bankruptcy you are getting rid of all those high balance and late payment accounts. With those accounts gone and not hurting your credit score you can build your credit back up. It is a chance at a financial fresh start.
