“I. Declare. Bankruptcy YYYYY!”
As Michael Scott learned on The Office, getting rid of debt is not as easy as this announcement. Wouldn’t that be nice?
Many people consider bankruptcy to be an easy way out. But these people never filed for bankruptcy.
The reality of bankruptcy is a drastic measure to prop up your finances and get your debt under control once you’ve exhausted all other options. And it has consequences – mostly serious damage to your bankroll.
But it can also be a lifeline. Bankruptcy creates an orderly, sanctioned plan that tells you who to repay and how much. This sense of order alone can be a relief for anyone staring at a pile of overdue bills.
We’re going to explain how bankruptcy works, what types of filings there are, and how these will ultimately affect your bottom line.
What is bankruptcy?
Bankruptcy is a legal process whereby a person, couple, or company with significant debts is either released from that debt or is allowed to pay it off according to a specific plan.
This may sound appealing when you are in debt, but you realize that you may still have to pay off your debts even after bankruptcy.
While for some people bankruptcy is better than having their wages garnished or their homes foreclosed, this should be a last resort to get rid of debt.
However, when you run out of options, bankruptcy can give you the ability to get your debts under control and free creditors and collectors off your back (and your bank account).
This is how bankruptcy works
The process is extremely complex. So don’t expect to go through it on your own – and don’t expect it to be cheap.
First, register with the bankruptcy court in your federal judicial district. There is at least one in every state. In most cases, this administrative process will be carried out by a trustee appointed for your case.
Before going bankrupt, consider whether you a Debt management plan. You can combine all of your credit card debt into one monthly payment, making it faster and at lower interest rates.
The trustee will help you file documents and monitor your assets throughout the case. You are an impartial player who, through speaking with either, can challenge your creditors’ claims or yours.
Then a bankruptcy judge will decide whether to pay off your debts. The judge could deny you for the following reasons:
- You have not maintained or submitted adequate financial records.
- You have not declared a loss of wealth.
- You have committed a crime B. perjury.
- You failed to obey a lawful bankruptcy court order.
- You have hidden property that should be in your property.
However, if you can show that you will not be able to repay debt, you should generally get relief.
If they decide in your favor, you are freed from personal responsibility for your debts and no further action can be taken by creditors to collect them.
Bankruptcy will ruin your credit score
Bankruptcy will be a black mark on yours Credit history – one that lasts up to 10 years.
But if you are overwhelmed with debt, your credit is likely already pretty badly damaged.
Some experts say that going bankrupt doesn’t do much more harm to your credit than bad payment history. Just make sure that bankruptcy is really your best option because the consequences are no fun.
Here is the story of a woman from what it feels like to file for bankruptcy and how she fixed her credit afterwards.
Types of bankruptcy for individuals
Individuals and couples can file for one of two types of bankruptcy.
Chapter 7 Bankruptcy
Chapter 7 is the most common and is often referred to as liquidation bankruptcy. It is intended for those who can demonstrate that they do not have the income or the means to pay off debts.
Filing for bankruptcy doesn’t mean you will lose everything you own. In fact, in most Chapter 7 bankruptcy cases, most of what is considered “reasonably necessary” to live and work is considered exempt. In many cases, this can include your car and your primary home.
Their 401 (k), 403 (b), and 457 (b) plans are all considered protected assets. This means you don’t have to use any money in these accounts to pay off your bankruptcy debts.
However, if you are far behind on your mortgage payments or are already in foreclosure, you could potentially lose your home. If you own a car that is worth a lot of money (think $ 15,000 or more), the trustee can sell it to pay off your debt. The rules and exceptions vary from state to state.
Chapter 7 does not have a debt limit, but your “funds” to pay off your debt will be reviewed and anyone who requests it will be required to take credit counseling courses within six months of submission.
Most people can assume that the process will lead somewhere three to six months.
Chapter 13 Bankruptcy
Chapter 13 – or “wage earners’ bankruptcy” – is aimed at those whose income makes it ineligible for Chapter 7. Individuals and families filing Chapter 13 work with a trustee to restructure, reorganize, and repay their debts over a period of three to five years. During this time, debtors are not allowed to take on additional debt.
You don’t need to liquidate any assets in Chapter 13 so you can keep your home. Instead, your payment schedule is determined by your household income and its comparison to your state’s median income.
Chapter 13 bankruptcy comes with some debt limits. According to the Federal Justiceyou can only have:
- Secured debt of $ 1,184,200, i.e. H. Debt that is secured by collateral such as a house or a car.
- $ 394,725 in unsecured debt.
Federal law requires you to make your first payment to your trustee 30 days after filing.
Other types of bankruptcy
The Describes federal justice Bankruptcy as it applies to corporations and less common types of bankruptcies. Here is a basic overview:
|Art||Usually used by||basic requirements||Debt limit||Registration fee *|
|Chapter 7||Individuals||Prove that you do not have the means to repay debts||n / A||$ 335|
|Chapter 13||Individuals||Have a steady income and the ability to repay debts||$ 419,275 unsecured; $ 1,257,850 secured||$ 310|
|Chapter 11||Companies||Engage in any commercial or business activity||$ 2,725,625||$ 1,717|
|Chapter 9||Municipalities, including cities, counties, and school districts||The community must be insolvent||n / A||$ 1,717|
|Chapter 12||Family farmers and fishermen||Individual or married couple whose main income and debts are related to agriculture or fishing||$ 10,000,000 Agriculture; $ 1,924,550 fishing||$ 275|
|Chapter 15||Foreign debtors||The case must involve parties outside the United States.||n / A||$ 1,717|
* Debt limit, fees, and requirements are correct as of October 2020.
What to Expect When You File for Bankruptcy
The process is quite lengthy and you should consult a bankruptcy attorney to make decisions on your individual case. Here’s a quick rundown of what to expect.
You can request that Chapter 7 fees be waived (with this form) or create a payment schedule for fees in Chapter 13 if you cannot afford them in advance. To be eligible for a waiver, your household income should be less than 150% of the poverty line (calculated here for you) and you do not have to be able to pay the fee in installments.
In addition, you are responsible for the different legal fees. However, a few thousand dollars are not uncommon.
Once you file for bankruptcy, creditors and collectors need to stop collecting the money you owe them while the case is open.
This is known as “automatic residence”.
If a company continues to attempt to collect during the stay, it will Violation of a court order. Let the company know in writing and the collections will likely be discontinued. If not, notify the bankruptcy court, which can penalize the company for violating a court order.
Remember: bankruptcy (almost) never settles this debt
Debtors typically use bankruptcy to pay off credit card or medical debts. However, many types of debt cannot be paid, including:
- Student Loan Debt (except sometimes).
- Child benefit.
- Most tax debts.
- Debt that you owe someone on a criminal or civil charge, such as: B. due to an injury caused by a DUI.
With car loans, your debt can be paid, but it can mean the creditor could seize property that you took out on loan – for example, repossession of your car.
You can instead choose to reconfirm the debt or leave it out of the bankruptcy relief and you will remain responsible for the repayment. And you can keep your property.
Beware of bankruptcy fraud
When filing, keep in mind: bankruptcy is a legal action brought in federal court. So if you try to convince your judge or trustee, you must face dire consequences. Here are some key no-nos:
- Hiding assets to prevent them from expiring.
- Intentionally submitting incorrect or incomplete forms.
- Multiple filings with false or real information in multiple jurisdictions.
- Bribery of a trustee appointed by the court.
If caught doing this, you could be fined, refused release or prosecuted.
Dana Sitar is a former writer and editor for The Penny Hoarder.
This article originally appeared on www.thepennyhoarder.com