For those struggling with extreme debt that seems impossible to escape, declaring bankruptcy may be the best solution. Bankrupcy can provide debtors with a fresh start to move forward with their lives without being hampered by the pressure of overwhelming debt.
It’s a decision, however, that should never be taken lightly. When you file for bankruptcy, you’re entering a legal process that can have long-lasting ramifications for your credit going forward. While a successful bankruptcy means you’ll no longer have to pay your debts or will have assistance repaying a portion of them, you may also have difficulty borrowing money or opening credit card accounts for another seven to 10 years.
Still, it’s an option that millions of Americans choose. From 2006 to 2017, 12.8 million consumer bankruptcy petitions were filed in federal bankruptcy court, according to the Administrative Office of the U.S. Courts. Non-business filings, which mainly involve consumer debt such as credit card bills, student loans and medical debt, comprised nearly all the bankruptcies during that time.
So how does bankruptcy work?
Here’s a bankruptcy primer:
Consider a bankruptcy attorney
Bankruptcy is a complicated process that costs money to file court papers and hire an attorney to shuttle the case through the legal process. Credit Karma estimates that it can cost from about $300 to $6,000 to file for bankruptcy.
And, while just about everybody who is filing for bankruptcy will have little cash on hand, successful filings often result from sound legal advice. Confusion about the law or making mistakes in the paperwork can affect your rights, according to the U.S. Courts. An attorney can advise you on any number of critical topics, including whether to file, what chapter to file under, the tax consequences of filing and if you should continue to pay your creditors.
If you need assistance finding a bankruptcy attorney in your area, Start Fresh Today offers an attorney locator to help.
If you can’t afford a lawyer, both the American Bar Association and Legal Services Corporation offer assistance to those in need.
Understanding Bankruptcy Types
Understanding how bankruptcy works means understanding that there are several different types of bankruptcy, including Chapter 9 for cities and towns, Chapter 11 for businesses and Chapter 12 for family farms. Chapter 7 and Chapter 13, however, are designed for the average consumer.
Chapter 7 is the most common type of bankruptcy. From 2006 to 2017, 68% of consumer bankruptcies were filed under Chapter 7, according to the U.S. Courts. In a successful Chapter 7 bankruptcy, the debtor no longer must repay any of their debts but will have to sell some of their property to pay their creditors. Those nonexempt items, which would be liquidated, include any available cash, valuable collections or a second car or home. What you can keep depends on what state you’re filing bankruptcy in as it can vary, but it typically includes Social Security payments, pensions and retirement savings, among others.
Chapter 13 bankruptcies are less common. Between 2006 and 2017, 32% of consumer filings were under Chapter 13. In these cases, the debtor pays off a portion of their debt and then is free from paying the remainder. As part of Chapter 13, the court signs off on a repayment plan that lets you use your future income, over the next three to five years, to pay off what you owe instead of selling off property. Once you’ve made all of the payments, you are no longer responsible for your debts, according to the Federal Trade Commission.
Gather the information
Before moving forward with a bankruptcy proceeding, you’ll need to gather reams of documents, including tax returns for the last two years, proof of income, information about the value of any property you may own and any other paperwork that relates to your finances.
Take required bankruptcy courses
Anybody who files for individual bankruptcy is required to take credit counseling and debtor education courses. According to the U.S. Courts, the credit counseling course must take place before you file. Debtor education begins after you file. U.S. Courts has more information about how to find approved courses.
Start Fresh Today offers the required bankruptcy courses for consumers in both English and Spanish.
Fill out the forms and file
Bankruptcy forms are lengthy and can take a substantial amount of time and information to complete. It’s typically best to fill them out with the help of an attorney to ensure you’re not missing any critical information that could quickly upend your filing. Once complete, your forms will be filed with the bankruptcy court to officially launch the proceeding. From there, you’ll need to attend any required hearings and comply with any other obligations to ensure your filing stays on track.
Wait for bankruptcy discharge
Bankruptcy discharge is the ultimate goal for Chapter 7 and Chapter 13 filings. A bankruptcy discharge, according to the U.S. Courts, “releases the debtor from personal liability for certain specified types of debts.” That means that the debtor is no longer required to pay off what they owe on debts that the court has identified. It’s a permanent decision that stops creditors from filing legal actions against the debtor or contacting them via phone calls or letters. What is discharged depends on the type of bankruptcy that was filed and what the court decides.
What happens after bankruptcy
While bankruptcy can relieve you of the stress that comes with massive debts, it can have a ripple effect on the rest of your life. As Experian, the credit agency notes, it means the loss of property; it can impact others who you owed money to, including friends and family; and it can damage your credit.
Before you forge ahead, be sure to consider all of your alternatives, including debt consolidation plans, to ensure you’re making the best decision for you and your family.
The team at CESI is committed to helping you make wise financial decisions and to helping you understand how to get out, and stay out of debt. For a free debt analysis, contact us and find out how we can help.
