10 Things to Know About Bankruptcy Before Filing

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know about bankruptcy

Watching your debts pile up month after month can be frustrating, stressful, and even depressing. If your income is not enough to pay your debts, or you have no income at all, it can be easy to feel hopeless, thinking that there is no way out of this situation.

However, there is an alternative that may be just what you need to get debt relief and regain control of your financial life – bankruptcy.

In a nutshell, bankruptcy is a legal process designed to help individuals who cannot pay their debts. It will eliminate most of your debts and allow you to rebuild your finances from scratch. But there are a few things you should be aware of before you decide to take such a big step.

To help you determine if bankruptcy is the best option, here are the top 10 things you should know about bankruptcy before filing.

There are Two Common Types of Bankruptcies for Individuals

If you are considering filing for bankruptcy, you must know that there are two common types of personal bankruptcy: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy may be your ideal solution to get rid of your debts quickly. In this chapter, a court-appointed bankruptcy trustee will manage the sale of your non-exempt assets and then distribute the money among your creditors to pay your debts.

On the other hand, Chapter 13 bankruptcy is a better option for those who do not want to sell some of their assets and have a steady source of income. In this case, you will have to create a 3-to-5-year repayment plan with the help of your bankruptcy attorney. If you comply with the plan, your remaining debts will be discharged at the end of it.

You Must Qualify First

To file for any bankruptcy, you will have to qualify first. In Chapter 7 bankruptcy, you’ll need to apply through a means test that will compare your income to the state median for similar households. If your income is below the median, you will qualify automatically. If not, you may still be eligible by deducting certain expenses to determine your disposable income. For more details on this, you should consult a bankruptcy attorney.

On the other hand, to file for Chapter 13 bankruptcy, you must demonstrate that you have sufficient income to comply with the repayment plan while meeting your basic needs.

Bankruptcy Forms are Complicated

Bankruptcy may be helpful, but more is needed. Far from it, bankruptcy forms can be simple. Not only will you have to check a few boxes to proceed with your filing, but you will also have to explain your financial affairs in detail.

To deal with this correctly, you will need time. Ensure you understand the questions on the forms and provide proper answers, leaving no details out. Remember that your bankruptcy could be rejected if you make a mistake, or you could even be accused of fraud.

Hiring a bankruptcy attorney may help facilitate the process and will help avoid unnecessary errors.

Working With an Attorney Might be a Good Idea

Working with a bankruptcy lawyer can be crucial to the success of your filing. Aside from assisting you with the bankruptcy forms, the attorney can also help you determine which bankruptcy chapter will give you the best results based on your financial situation.

Furthermore, the attorney will represent you at the meeting of creditors and all necessary hearings during your filing. If any problems arise, your attorney will know what to do to deal with the situation.

Finally, a bankruptcy lawyer can advise you on what to do right after your discharge, providing options to rebuild your credit as soon as possible.

Most bankruptcy attorneys offer free consultations. Use this time to ask other questions about the process and how the attorney may help you.

Find the right bankruptcy lawyer for your case and keep your peace of mind during your filing.

Bankruptcy Isn’t Cheap

You should keep in mind that filing for bankruptcy won’t come cheap. To begin with, you will have to pay filing fees to the bankruptcy court. For instance, you must pay around $335 for a Chapter 7 filing and about $310 for a Chapter 13 filing. Also, you must pay for a mandatory financial management course, which can vary between $30 and $100 depending on where you file.

On the other hand, you should consider your bankruptcy attorney’s fees. These may differ depending on the type of bankruptcy you wish to file.

Since you have financial problems, ask about the attorney’s cost structure during your free consultation and work with an option that fits your current budget.

You’ll Get an Automatic Stay

A great benefit of bankruptcy is that right after your petition, the court will issue an “automatic stay,” which will prevent creditors from being able to collect the debt and stop proceedings such as foreclosure during your bankruptcy filing.

Within this time, you will be able to regain your peace of mind without creditors constantly harassing you to pay your debts, and you may even be able to renegotiate the terms of your mortgage to keep your home. Alternatively, you can include your mortgage payment in your repayment plan in Chapter 13 bankruptcy.

Your Filing Will Stay in Your Credit Report for Years

Bankruptcy will remain on your credit report for seven years in Chapter 13 bankruptcy or ten years in Chapter 7 bankruptcy. Remember that it will severely affect your credit score, and it may not be easy to obtain credit cards or other types of loans during that time.

However, you can opt for secured credit cards and similar solutions to rebuild your credit right after filing.

Bankruptcy may stain your credit report, but consider it the price to pay for debt relief.

You Might Get to Keep All Your Properties.

Many people think that filing for bankruptcy means that you’ll lose all of your belongings. This is not true. In Chapter 13 bankruptcy, as long as you adhere to the repayment plan, you won’t have to worry about losing your assets.

On the other hand, in Chapter 7 bankruptcy, although it is assumed that you will have to sell some of your assets to pay your debts, you might not have to. In most cases, Chapter 7 bankruptcy filings are categorized as “no-asset cases,” meaning that the filer has no assets that would qualify as non-exempt and will get debt discharge without having to sell anything at all.

Of course, this will depend on your specific situation. Talk to your bankruptcy attorney to find out if this might apply to you as well.

Bankruptcy Won’t Wipe out all Debts

Bankruptcy will wipe out most of your debts, but not all of them. Among the debts that can be discharged through bankruptcy are credit card debts, personal loans, medical bills, etc.

Conversely, certain debts cannot be eliminated through this process, such as alimony, student loans, and certain taxes.

Secured debts such as auto loans can be reorganized through the Chapter 13 bankruptcy repayment plan but cannot be discharged in Chapter 7.

You’ll Get a Fresh Start

The last thing you should know about bankruptcy is that you will get a fresh start at the end of the process, enabling you to regain control of your life and rebuild your finances from scratch.

After that, you’ll soon realize that the peace of mind of a debt-free life is priceless.

Now that you know, it’s time to take action. Contact a local bankruptcy attorney and begin the process of getting the debt relief you so desperately need.

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Jason Butler is the owner of My Money Chronicles, a website where he discusses personal finance, side hustles, travel, and more. Jason is from Atlanta, Georgia. He graduated from Savannah State University with his BA in Marketing. Jason has been featured in Forbes, Discover, and Investopedia.