If you have large debts that you can’t repay, are behind in your mortgage payments and in danger of foreclosure, are being harassed by bill collectors or all of the above declaring bankruptcy might be your answer. Or it might not be. Bankruptcy can, in some cases, reduce or eliminate your debts, save your home and keep those bill collectors at bay, but it also has serious consequences, including long-term damage to your credit score. That, in turn, can hamper your ability to borrow in the future, raise the rates you pay for insurance, and even make it difficult to get a job.
Types of Bankruptcy
Bankruptcy cases are handled by federal courts, and federal law defines six different types. The two most common types used by individuals are Chapter 7 and Chapter 13, named after the sections of the federal bankruptcy code where they are described. Chapter 11 bankruptcy, which is often in the headlines, is primarily for businesses.
Chapter 7 bankruptcy, the type most individuals file, is also referred to as a straight bankruptcy or liquidation. A trustee appointed by the court can sell some of your property and use the proceeds to partially repay your creditors, after which your debts are considered discharged. Some types of property can be exempt from liquidation, subject to certain limits. Those include your car, your clothing, and household goods, the tools of your trade, pensions, and a portion of any equity you have in your home. You should list the property you are claiming as exempt when you file for bankruptcy.
Chapter 13 bankruptcy, on the other hand, results in a court-approved plan for you to repay all or part of your debts over a period of three to five years. Some of your debts may also be discharged. Because it does not require liquidating your assets, a Chapter 13 bankruptcy can allow you to keep your home, as long as you continue to make the agreed-upon payments.
Certain types of debts generally can’t be discharged through bankruptcy. Those include child support, alimony, student loans, and some tax obligations. There are a number of legally required steps involved in filing for bankruptcy. Failing to complete them can result in the dismissal of your case. Before filing for bankruptcy, individuals are required to complete a credit counseling session and obtain a certificate to file with their bankruptcy petition. The counselor should review your personal situation, offer advice on budgeting and debt management, and discuss alternatives to bankruptcy. You can find the names of government-approved credit counseling agencies in your area by calling the federal bankruptcy court closest to you or by visiting its website. Filing for bankruptcy involves submitting a bankruptcy petition and financial statements showing your income, debts, and assets.
You will also be required to submit a means test form, which determines whether your income is low enough for you to qualify for Chapter 7. If it isn’t, you will have to file for Chapter 13 bankruptcy instead. You will also need to pay a filing fee, though it is sometimes waived if you can prove you can’t afford it. You can obtain the forms you need from the bankruptcy court. If you engage the services of a bankruptcy lawyer, which is usually a good idea, they should also be able to provide them. Once you have filed, the bankruptcy trustee assigned to your case will arrange for a meeting of creditors, also known as a 341 meeting for the section of the bankruptcy code where it is mandated.
This is an opportunity for the people or businesses that you owe money to ask questions about your financial situation and your plans, if any, to repay them. Your case will be decided by a bankruptcy judge, based on the information you have supplied. If the court determines that you have attempted to hide assets or committed other fraud, you may not only lose your case but also face criminal prosecution. Unless your case is very complex, you generally won’t have to appear in court before the judge.
After you have filed for bankruptcy but before your debts can be discharged, you must take a debtor education course which will provide advice on budgeting and money management. Again, you will need to obtain a certificate showing that you have participated. You can obtain a list of approved debtor education providers from the bankruptcy court or from the Justice Department. Assuming the court decides in your favor, your debts will be discharged, in the case of Chapter 7. In Chapter 13, a repayment plan will be approved. Having debt discharged means that the creditor can no longer attempt to collect it from you.
Consequences of Bankruptcy
Both types of individual bankruptcy have some negative consequences. A Chapter 7 bankruptcy will remain on your credit record for 10 years, while a Chapter 13 bankruptcy will generally remain for seven years. Note, too, that there are limits on how often you can have your debts discharged through bankruptcy. For example, if you have had debts discharged through a Chapter 7 bankruptcy, you must wait eight years before you can do so again. Unlike corporations and partnerships, individuals can file for bankruptcy without an attorney. It’s called filling the case “pro se.” But because filing for bankruptcy is complex, and must be done correctly to succeed, it’s generally unwise to attempt it without the help of an attorney experienced in bankruptcy proceedings.
After Declaring Chapter 7
If you are an individual considering filing for bankruptcy, Chapter 7 bankruptcy will likely be the type of bankruptcy that can give you the relief you are looking for.
As soon as your bankruptcy is filed with the Court the automatic stay will go into effect. The automatic stay is a part of the Bankruptcy Code that prohibits your creditors from trying to collect money from you. Once the automatic stay is in effect, your creditors can’t call or otherwise contact you, and any collection actions that they might have pending against you must stop. If you’re subject to a wage garnishment at the time your case is filed, this has to stop starting with your first payday after filing.
Unfortunately, bankruptcy relief doesn’t come free. The Bankruptcy Court charges $338 to file for Chapter 7 bankruptcy. In addition to court filing fees, filers typically pay approximately $10 – $50 for each one of the two mandatory credit counseling courses. If your income is less than 150% of the federal poverty guidelines, you may be able to have both the court filing fee and the credit counseling course fee waived.
When filing for bankruptcy relief, you will have to fill out a number of different forms to provide all required information about your debts, assets, income, and expenses to the Court. These forms are the same across all of the United States and can be found online for free. Depending on the state you’re filing in, you may have to complete certain local forms required by the Court in your district as well.
You will be required to attend a meeting of creditors about 21 – 40 days after your case is filed. During the meeting, the bankruptcy Trustee handling your case will ask you basic questions about your bankruptcy petition and financial situation.
Treatment of Assets
Once you have filed for Chapter 7 bankruptcy, your assets will be evaluated by the Trustee. Any unprotected assets may be sold by the Trustee to pay your creditors. Many assets are exempt from being used by the Trustee to pay your creditors. In 96 % of all Chapter 7 bankruptcy cases, no property is sold by the Trustee and no money is paid to creditors. Once you’ve filed for Chapter 7 bankruptcy, it will take approximately 3 – 4 months for your discharge to be entered. If your Trustee tells the Court that there are no funds to distribute to your creditors, the case will be closed shortly thereafter. If your case is an asset case, because the Trustee is planning to sell a non-exempt asset, the case can stay open for more than a year while the Trustee completes the administration of your case.
Consequences of Bankruptcy
As with any legal process, bankruptcy is a complex issue with both positive and negative consequences. Anyone considering filing for bankruptcy should consider all the possible outcomes before taking this step. Whether one is considering a Chapter 7 straight bankruptcy or a Chapter 13 repayment plan case, consulting with a qualified consumer bankruptcy attorney is paramount to ensuring that the process runs smoothly and advantageously. Before you schedule an appointment with an attorney, you can familiarize yourself with a few basic consequences for any bankruptcy case.
On a positive note, declaring bankruptcy typically results in discharge. Discharge is when a bankruptcy court hands down a permanent order that forever prevents creditors from collecting on debts you previously incurred. Credit card debt is one common form of debt that can be discharged by a bankruptcy court. Courts have decided that credit card companies can afford to take the financial hit of forgiving debt the companies won’t go out of business over an individual’s debt. That individual will be much more productive if they aren’t drowning in debt. There are exceptions, such as recent tax liabilities and alimony and child support obligations. These debts are considered too important to wipe clean, but a Chapter 13 bankruptcy may help you establish more feasible payment plans. Furthermore, the discharge does not extend to real estate property. Therefore, any liens a home loan lender has on your house will remain in effect after bankruptcy. Consequently, lenders may foreclose on your home if you default on a loan.
Another positive aspect of filing for bankruptcy is the automatic stay. This feature is essentially a preliminary court decree. When the bankruptcy case enters the court, it immediately protects the bankruptcy filer from creditors seeking to collect on a debt. Consequently, creditors may not call you on the phone or send collection notices in the mail. In most cases, the automatic stay remains in effect until the bankruptcy court decides which debts will be wiped clean and which debts must be honored. This process is known as issuing a discharge. However, there are other instances in which an automatic stay will be lifted. An automatic stay that protects your property, for instance, might be lifted if the value of the property is less than the debt owed.4 Divorce proceedings may also complicate what the automatic stay protects.
A bankruptcy filing typically depresses a person’s credit score. Also, bankruptcy won’t erase the history of your past debts, even if the debt itself is discharged. Lenders will take all this as a sign that you’re a risky borrower, and you could end up with high-interest rates for loans if you even qualify for them at all. While this is a legitimate concern, one may slowly rebuild their credit after the bankruptcy. The bankruptcy will remain on your credit report for many years, but the net effect of bankruptcy on credit scores is typically positive. That’s because, while bankruptcy takes a bite out of your credit score, as does growing debt. If bankruptcy is your only way to stop debt from growing, it may be worth taking the hit to your credit score, to build it back up over time.
A negative consequence of filing for bankruptcy is that everything you file with the court—including all of your bankruptcy schedules, which contain your personal financial information, can be accessed by the public. That means friends, family, employers, and clients could find out the details about how much money you owed to who. For some individuals, this is a deal-breaker. For others, the benefits of declaring bankruptcy outweigh the privacy factor—especially because certain sensitive information is protected. For instance, only the last four digits of Social Security and taxpayer-identification numbers are public, and any minors involved will be listed by their initials.
Possible Loss of Property
Those who declare bankruptcy may lose property to the bankruptcy trustee. The point of filing for bankruptcy is to have the court step in and decide how much debt you can afford to pay off, and how much should be forgiven. If you own property with significant value such as luxury cars, you may be forced to sell that item to pay off some debt.
However, if you can successfully exempt your property, the trustee will not be able to sell it. Even if you are unable to exempt some properties, it may not be economically advantageous for your trustee to sell a particular item out from under you. For example, if it costs $1,000 to auction off a car that’s worth only $850, the trustee is likely going to let you keep that vehicle. As mentioned above, this point becomes complicated when a piece of property, such as a home, has been put up as collateral. That gives the creditor greater leverage in attempting to seize the property. Once you are a bankrupt your unsecured creditors will cease to contact you. If you want this to happen then you must list all your unsecured creditors in your Statement of Affairs. This will also include debts which you have taken out with another person, that is joint debts, and even money you may owe to your family and friends. Most legal action which an unsecured creditor had taken against you must stop once you file for bankruptcy.
This also applies to a garnishee from your income or bank account or any recovery action by a sheriff or bailiff. If any of your unsecured creditors continue to contact you then you should notify your trustee. They will contact the creditor. There are some debts which you must continue to pay during bankruptcy and these include:
• Penalties and fines imposed by the court
• Unliquidated damages from accidents e.g. car accidents may be an exemption
• Student assistance/supplement loans and HELP debts
When you become a bankrupt some of your assets can be retained because they are protected property and some may be recovered by your trustee and sold. An asset is defined as anything of value you own when you become a bankrupt and anything you buy or receive before the end of your bankruptcy. When you become a bankrupt what you may keep includes:
• Most of your ordinary household or personal items
• Tools of trade used to earn an income up to a set limit
• Vehicles (e.g. cars or motorbikes) up to a set limit
• Most funds in a complying superannuation fund
• Life insurance policies
• Compensation for a personal injury
• Centre link payments are also protected
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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