Statistics show that 60-percent of Americans live from paycheck-to-paycheck. This lifestyle comes packed with financial pressure, and it’s not surprising that nearly 11-percent of the adult population, or nearly 37-million Americans have some form of personal debt.
In 2018, nearly 800,000 Americans filed for Chapter 7 or 13 Bankruptcy. For most of those people, going bankrupt was a much-needed relief. Bankruptcy stops the endless hounding by creditors looking for money.
If you’re experiencing financial difficulties, and you’re struggling to cover your debts, know that you aren’t alone. Millions of other Americans are also considering whether or not to file for bankruptcy.
There are some benefits and drawbacks to filing for Chapter 7 or 13. In this guide, we’ll look at everything you need to know about filing for bankruptcy.
Bankruptcy Explained
Filing for bankruptcy is one of the most serious financial decisions you can make in your life. Things will change dramatically for you after filing. Some of the events that will transpire will be positive for you, while others present new challenges in your financial situation.
Going bankrupt frees you from the obligation to repay any consumer debts. If you have outstanding bills, credit card debt, store debts, or personal loans, all of these disappear from your radar. You get to start fresh with a new outlook on your finances.
However, while these features of bankruptcy may seem appealing to anyo0ne that’s drowning in debt, there’s a flip side as well. Filing for bankruptcy ruins your reputation in the financial system. We all have a credit score and credit report that lenders use to assess us for risk when we apply for credit facilities.
As a newly bankrupted individual, you can forget about accessing the credit system for a while, a long while. You’ll need to work with cash for the coming years. You’ll also find that life’s a little harder when people and organizations don’t see you as creditworthy.
Bankruptcy is a legal process where an individual appears before the court to solemnly swear that they can no longer afford to pay their debts. The individual will either file for Chapter 7 or 13 bankruptcy, depending on their financial situation.
The court makes a ruling on your case based on the merits of the situation. If they approve your filing, then you are absolved of the majority of your debt obligations to creditors. It’s important to note that bankruptcy only works in clearing debts at the consumer level. If you have any federally-insured debts, such as a student loan, then you remain liable for these amounts.
Going bankrupt has long-lasting financial implications for your life. Is it something you need to consider? Or should you avoid filing? Let’s unpack the benefits and drawbacks of going bankrupt.
Read: How to Erase Debt on Your Credit Report in Under a Year
The Two Types of Bankruptcy
When an individual, not a business, files for bankruptcy, they have two options, Chapter 7 or 13. If you’ve ever heard news stories about Chapter 11 bankruptcy, it’s because it pertains to corporations.
Chapter 7 Bankruptcy
With this filing, you get debt forgiveness for all types of consumer credit, such as credit cards, personal and auto loans, and medical bills. In exchange for granting your debt forgiveness, the court orders you to surrender any assets to a trustee who sells them to cover the creditor’s losses.
Some assets do not count toward seizure during a Chapter 7 filing. Your home, clothing, and furniture are not at risk of forfeiture, and you don’t have to stress about not having a roof over your head. If your home is near foreclosure, then filing for Chapter 7 will provide you with a stay, and your lender must immediately stop the foreclosure proceedings.
However, it’s important to note that you don’t get total debt forgiveness with a Chapter 7 filing. Federal debts, like student loans and tax obligations, are still valid. Responsibilities like compensation to victims of personal injury cases, child support, and alimony are still legitimate debts you need to account for in your finances.
In most cases, it usually takes around three to six months for Chapter 7 filing to go through the court system to reach finalization.
Chapter 13 Bankruptcy
This option is slightly different from Chapter 7. With Chapter 13, you don’t get any debt forgiveness. However, the court orders your outstanding debts into the control of a trustee for 60 to 90-days. During this time, you have the opportunity to settle your outstanding creditors.
If your home is currently under foreclosure, then filing for Chapter 13 will halt the proceedings, and give you a temporary stay. You won’t have to sell any of your assets as long as you adhere to the trustee’s settlement plan.
Why Doesn’t Everyone File for Chapter 7?
If Chapter 7 absolves you from your consumer debts, why does anyone file for Chapter 13? Not everyone that applies for Chapter 7 receives a favorable ruling on their situation. For an applicant to successfully apply for Chapter 7 bankruptcy, they must show that they have no disposable income, and are struggling to pay their bills.
The court looks for the median income in your area over the last 6-months. They then compare that data to your bank statements for your earnings. If your income is below the median average for the previous 6-months, then you qualify for Chapter 7.
Filing for Chapter 13 also means that you could get a reduced rate on your monthly student loan obligations. If you have any secured loans that have a co-signer, filing for Chapter 13 absolves the co-signer of their financial commitment.
Filing for Chapter 13 also protects your assets from seizure and auction as well. As a bonus, going for Chapter 13 allows you to pay your attorney fees throughout the bankruptcy, instead of upfront.
Read: Lexington Law Review: Complete Guide to this Credit Repair Company
The Steps for Filing for Bankruptcy
So, how do you file for bankruptcy? The process can be tricky to navigate, and you’ll need the assistance of an attorney to handle your case.
Filing for Chapter 7
Here’s everything you need to know about filing for Chapter 7 bankruptcy. You’ll need to complete mandatory bankruptcy counseling from a non-profit counselor before you apply. The paperwork involved with filing for Chapter 7 is extensive, which is one of the reasons why people chose to work with bankruptcy attorneys.
Some people may find it challenging to raise the money to hire an attorney. However, it’s a worthy expense, and hiring an attorney will ensure your filing goes through. Without a lawyer, the court could throw out your application, or the judge could rule that certain debts do not qualify for the bankruptcy.
Your attorney files your bankruptcy petition on your behalf, and you’ll need to provide your lawyer with a list of all of your assets, debts, and income. After filing, creditors will stop chasing you for payment, and they cannot garnish your wages or sue you in court for the recovery of debts.
The court appoints a trustee to your case. You’ll need to go through a questionnaire in the presence of the trustee, your lawyer, and your creditors. After reviewing your application and paperwork, the trustee decides on whether or not you qualify for Chapter 7.
If the trustee deems you eligible for bankruptcy, then the trustee goes through your list of assets. They determine what they can sell to cover as much of your outstanding debt as possible. The majority of Chapter 7 filings involve people with no assets at all.
If you have any secured credit facilities, the creditor may keep the collateral to cover any outstanding monies owed. You can pay the creditor the market value of the collateral if you want to avoid selling it. You can also reaffirm the outstanding debts, exclude them from the filing, and continue with a payment plan.
You’ll also need to attend a financial literacy course to educate you about the responsibility of handling money in the future. Three to six months after filing, your case gets discharged, and the courts forgive all your eligible debts. Shortly after that, the court closes your case.
Filing for Chapter 13
To qualify for Chapter 13 bankruptcy, you’ll need to have an income, and your unsecured debts cannot exceed $394,725, while your secured debts cannot be more than $1,184,200. You’ll also need current tax filings for your application as well.
Most of the rest of the procedures involved with filing is similar to Chapter 7. You’ll also need the services of a bankruptcy attorney as well. However, with Chapter 7, you need to pay the attorney costs upfront. With Chapter 13, the legal fees get added to your total debt amount, allowing you to pay off the fees in payments throughout the bankruptcy period.
After the courts appoint a trustee, you’ll need to submit a payment plan within 14-days of filing your petition. You have 30-days after filing to start making payments, even if the courts have yet to approve your request.
You meet with your attorney and creditors around 21 to 40-days after filing and discuss the term of your payment plan. 45-days after that meeting, you’ll meet in court with creditors and the trustee to discuss any issues with your payment plan and ask you questions.
After approval, you’ll have three to five years to pay off your existing debts, at which you return to normal financial standing in the eyes of the law and the credit bureaus.
Who Should Think About Filing for Bankruptcy?
Filing for bankruptcy is a serious life decision with lasting impact. When you file for bankruptcy, it clears you of all of your debts, providing you with financial relief. However, your filing goes onto your credit report with the three big credit bureaus, Equifax, Equestrian, and TransUnion. The filing stays on your credit report for the duration of your bankruptcy.
If you have a bankruptcy filing on your credit report, then the chances are that you have terrible credit. As a result, you’ll find it challenging to secure any form of credit facility in the future. Even after your bankruptcy ends, lenders still require you to disclose any previous bankruptcies when applying for new credit facilities.
You may think that living a cash lifestyle doesn’t sound too bad. However, the problems reach further than you think. You might find it hard to secure a job, especially in the financial services industry.
You’ll also find it difficult to secure insurance without paying astronomical premiums. Lastly, you’ll also struggle to find a place to rent. Landlords check your credit before they draw up a lease. If you have bad credit, they’ll think twice before they rent you the apartment.
If you want to file for bankruptcy, make sure you are confident about your decision and its impact on your financial future.
Who Should Avoid Filing for Bankruptcy
If you have a few debts, but you’re not at risk of losing your home to creditors, then avoid filing for bankruptcy. While it may seem like a tempting option to escape your debts, it has lasting repercussions that will haunt you for the rest of your days.
If you’re struggling financially, but you have a decent income, then try an alternative to filing for bankruptcy instead. Debt consolidation and refinancing are two valid options that could help you escape from your debt trap and avoid bankruptcy.
Speak to a financial advisor and get their opinion on your case before you decide to file.
Read: Is Refinancing Your Student Loans a Good Idea?
Medical Bills – The Biggest Cause of Bankruptcy in America
In 2018, more than 530,000 Americans filed for Chapter 7 bankruptcy. If you’re thinking about filing, then the chances are that you all have something in common that’s pushing you toward the edge – Unpaid medical bills. According to research, unpaid medical bills are the most concerning factor involved with Chapter 7 filings.
Most people think that some other form of consumer debt, such as irresponsible credit card lending, is responsible for the majority of bankruptcies in the United States. Since medical bills are the leading cause of the issue, it’s easy to see why some politicians are touting for a better universal healthcare system than Medicare.
Sources:
- https://www.uscourts.gov/services-forms/bankruptcy
- https://www.debt.org/bankruptcy/
