Bankruptcy often comes with negativity. Once the bankruptcy word is thrown out there, people begin to make assumptions. Most instantly think “wow, their financial situation must be really bad!” Even worse, people who are in really rough financial situations begin to think negatively about themselves when considering it, even though bankruptcy may be a viable option for them.
Despite all of the horror stories, there is life after you file for bankruptcy! I, myself, are neither for nor against it. I feel the pros and cons vary depending on each individual’s overall financial situation.
So, today I want to breakdown the facts about bankruptcy to help you determine if it may or may not be the right choice for you.
What is bankruptcy?
“Bankruptcy is a constitutionally guaranteed right that permits people (and businesses) to ask a court to wipe out all their debts” (Garman, Forgue, 2015). Basically, bankruptcy prevents the continued efforts by creditors to collect debts. It can, potentially, eliminate repayment obligations, in an attempt to gain a fresh financial start.
How does it affect my credit?
Bankruptcy will have a negative effect on your credit, and will remain on your credit report for 10 years. Generally, if you’re severely behind on payments before the bankruptcy, your credit score has already been affected. However, your credit score can be reduced by as much as 200 points. If you manage your personal finances responsibly after bankruptcy, you can slowly increase your score even with the bankruptcy still on your report.
How much debt is enough to declare bankruptcy?
There’s no set amount for how much debt you need to “officially” file for bankruptcy. If you file for chapter 7 you will need to pass a “means test.” This is to prove that you’re unable to meet your debt obligations. Even if don’t pass the test, Chapter 13 is still an option. Here are a few things to consider before declaring bankruptcy:
*More details on Chapter 7 and 13 filings are below.
- If you have secured debts (i.e. home mortgage, car loan), and can’t pay past due balances and current payments, bankruptcy may not be beneficial in the long run.
- Student loans, back taxes, and child support are a few debts that are not covered by bankruptcy. If either of these are a big part of your debt, bankruptcy may not work for you.
- Evaluate your overall financial situation to see if there are alternative options to dealing with your debt.
What’s the difference between chapter 7 and chapter 13 bankruptcy?
- Chapter 7 bankruptcies are usually very straightforward.
- You must pass a “means test,” which compares your monthly income with expenses in various categories.
- You are required to receive budget and credit counseling from an approved credit counseling agency within 180 days of your bankruptcy case being filed.
- Most types of unsecured debts such as credit cards, medical bills and personal loans are discharged, however, certain types of debts, such as federal or state taxes, child support, and student loans may not be discharged.
- Once you file chapter 7 bankruptcy, your creditors are notified. You then enter into a temporary automatic stay period where creditors must stop all action against you.
- If you want to keep your secured debts, you will need to work out a repayment agreement also known as a reaffirmation.
- This type of bankruptcy is known as the wage earner’s plan because it’s for individuals with regular income who may be able to pay some or all of their debts.
- A payment plan, which can be as long as five years, allows you to catch up on payments. You get to keep all of your property.
- You have to begin making payments within 30 days after judgement.
- You have to consistently make the arranged payments during the time window allotted.
How much does bankruptcy cost?
The filing fees are $335 for a chapter 7 and $310 for a chapter 13, but the true cost of bankruptcy varies depending on how much bankruptcy attorney fees are in your state.
Overall, bankruptcy is a very big financial decision that shouldn’t be taken lightly. Evaluate your situation and seek qualified professional help from a bankruptcy attorney if you do chose to file.
For more information about bankruptcy, check out the links below.
Federal Trade Commission
United States Courts
Bankrate Bankruptcy Myths