Debt can be crushing. Getting ahead of your bills can be difficult to manage, especially if you are finding it hard to afford your debt. There are more bills than there is income, and you may feel way over your head. Oftentimes it may feel like bankruptcy is the only way out of a financial bind. Sometimes it is, but it is not foolproof. There are consequences to filing for bankruptcy and it does not always erase every single one of your debts. If you are feeling way in over your head, here is your complete guide to bankruptcy so you can make an educated decision for yourself.
What Is Bankruptcy?
Before we go too far into detail, first let us explore what bankruptcy is and what it means. Simply put, it is when an individual or business legally proclaims that they are unable to pay off their debts. In other words, it is a way to rid yourself clean of your financial burdens, to some extent. There are two types of bankruptcy you should be aware of: Chapter 7 and Chapter 13. They each serve different purposes.
When filing for Chapter 7 bankruptcy, your credit card debts, personal loan debts and medical bills will be forgiven entirely. It is a process with many moving parts. First, you have to agree that a trustee who will oversee your case can sell some of your assets. Once you agree to that, your trustee will sell certain assets and use the money from those sales to give to creditors. This whole process can be anywhere between three to six months.
Keep in mind that your assets like home, furniture, clothes and certain auto equity cannot be sold. So if your home is going under or near foreclosure, the bank has to immediately stop once you file for Chapter 7. You do not have to worry about being kicked out of your home after you file for that type of bankruptcy.
As mentioned, Chapter 7 does not forgive all of your debts. Things like student loans, child support, alimony, past due income taxes, and damages owed to your victims if you killed or injured someone while drunk driving are all things you still have to pay back even if you file for Chapter 7 bankruptcy.
You have to qualify to file for Chapter 7 as it is means tested. What that essentially means is that you have to have very little to zero disposable income. They compare your monthly income for six months before declaring bankruptcy to the median income of a comparable household where you are a local resident. If you income is lower than that median comparable income, than you qualify for Chapter 7.
When you file for Chapter 13, your debts are not forgiven but rather reorganized. Once you file for this type of bankruptcy you have to make monthly payments to a trustee for anywhere between 36 to 60 months. All of that money is then turned over to your creditors that have filed a claim for moneys owed. The great thing about filing for this is that you do not have to sell any of your personal assets and if your home is in foreclosure filing will thwart the process.
Chapter 13 also helps to reduce your monthly student loan payments. You are given about three to five years to pay off or get caught up on all your past due mortgage, car payments, child support and alimony.
How To File For Bankruptcy
Now that you have a better understanding of bankruptcy, what it is and the different types, we can dive into how to file successfully. There is a different process for each type of bankruptcy. Keep in mind that it is not free and there are bankruptcy filing fees that have to paid.
Filing Chapter 7
Before you even think about filing for Chapter 7, it is recommended that you complete bankruptcy counseling by a certified non-profit credit counseling agency. It is also highly recommended that you hire a bankruptcy lawyer because there is a lot of paperwork involved. Ensuring that your paperwork is filled out accurately is crucial as it could determine if your case gets thrown out or not. In order to file, you have to give your attorney proof of assets, income and debt in addition to your Chapter 7 paperwork and your petition for bankruptcy.
After that, the court will appoint a trustee who will oversee your case. They will meet with you and your attorney to go over some important financial questions that you have to answer. They will use this information to determine if you are eligible to file under Chapter 7, and if you are, your trustee will determine what assets to sell to pay back your creditors.
You may also be require dot take another financial literacy class, and after three to six months after filing your case will be discharged, your debts will be forgiven and your case will be closed.
Filing For Chapter 13
You have to quality to file under this type of bankruptcy as well. You have to a regular income, unsecured debt cannot be more than $394,725 and your secured debt cannot be more than $1,184,200. Your tax filings must also be current. Just like when filing for Chapter 7, you are required to take bankruptcy counseling and tp hire an attorney to file your paperwork and submit your petition to bankruptcy. A trustee will be appointed by the court. After all of this is done, you have to submit a repayment plan within 14 days of filing your bankruptcy petition. If your petition has not been approved yet, you must still make payments.
Your attorney will arrange a meeting with your creditors somewhere between 21 to 50 days after you have filed your petition. At this meeting your creditors will have the opportunity to ask you any financial questions they have about your plan and overall finances. Inside 45 days of that meeting, the trustee and any lenders wanting to attend will convene in court to go over and confirm your payment plan.
After that, you have up to three to five years to pay off your debts as agreed according to your payment plan. Before the end of your bankruptcy period, you have take another financial literacy course and complete it in its entirety. You can learn more about bankruptcy in Texas or wherever you are local, so that you can make the best decision for you.
Alternatives To Filing For Bankruptcy
As mentioned, filing for bankruptcy is not the end all, be all solution to getting your financial life back in order. There are other options you can go for to get your debts under control and more manageable.
Refinancing is a great option if you are looking for an alternative to filing for bankruptcy. You can take out a new loan and use that loan to pay off your existing debt. Make sure that the newer loan has a lower interest rate or at least a longer term so you can take your time paying it back. You could also get a zero percent APR balance transfer card if you are looking for a way to get out of credit card debt. When you go with this option though you have to make sure that you pay it back before the zero percent APR period is over.
Refinancing your student loan debts is also a great idea as it can lower your interest rates. Another option is to make a payment plan with each of your lenders directly. Surprisingly, there are a lot of companies that would be willing to work with your financial situation to give them the money that is owed and to get you back on track.
Consolidate Your Debt
This is another great way to manage your debt without having to file for bankruptcy. You would be surprised how many credit card companies are willing to forgive some debts. All you have to do is ask. That should free your mind up from wondering if you should pay off one debt with a credit card or loan. People do that all the time as a way to consolidate their debts. You could even enlist some companies to help you substantially decrease some of your debts your currently have.
What Is The Right Decision?
Ultimately, it is up to you and your specific financial situation. You situation is different from someone else who is filing for bankruptcy. You could be going through a home foreclosure, or maybe you lost a job and are experiencing financial hardship. It all depends on your specific situation. Filing for bankruptcy can sometimes slow a process that is and will continue to be in motion, giving you time to prepare and save. If you have been out of work for a while or your wages are being garnished, sometimes filing for bankruptcy is the best option.