The Most Important Things You Need To Know About Bankruptcy
Bankruptcy typically has negative connotations. However, it is intended to help you when you’re overwhelmed by debt. How does the process work? Do you need a lawyer? What happens to your outstanding balances? Continue reading for all the answers to these questions and more.
What Is Bankruptcy?
Bankruptcy refers to a legal debt relief process that falls under the jurisdiction of the federal courts.
What does being bankrupt mean? Bankrupt is a legal status used to refer to borrowers who’ve accumulated so much debt that it’s impossible to pay their monthly bills.
Reaching this state is usually the consequence of living beyond one’s means, but it can also unfold due to emergencies. Medical bills, for instance, are one of the leading causes of bankruptcy in the United States.
What Are The Different Types Of Bankruptcy?
Both Chapter 7 and Chapter 13 discharge your debts and stop all collection actions such as wage garnishments. Both impact your credit score, but there are also many differences between the filing types that should be understood.
- Non-exempt assets will be sold under the supervision of a federal court trustee
- The proceeds from the sale will be disbursed to your creditors
- The court discharges any balance that remains on your outstanding accounts
- Debt such as student loans, taxes, and court-ordered child or spousal support can’t be discharged
- This type remains on your credit report for ten years
- You’ll need to wait another eight years before filing another Chapter 7
- You don’t forfeit your assets
- The court and your legal counsel agree on a three-to-five-year repayment plan
- If you don’t repay all your eligible debts during this period, the balances are discharged
- Chapter 13 remains on your credit report for seven years
- If you go into debt again, you’ll need to wait two years before filing another Chapter 13
How Does The Bankruptcy Process Work?
You can file on your own, but it’s advisable to retain a lawyer’s services or use the free legal services in your community.
While the proceedings are straightforward, discharging your debt through this process isn’t a given. You must meet specific requirements to be eligible to file. In addition, most courts require you to complete credit counseling sessions.
The Federal Rules of Bankruptcy Procedure govern the process. Moreover, the judge has sole authority to decide if you’re eligible to file and whether you should receive a discharge of your balances.
A Chapter 7 bankruptcy process is mostly procedural. You’ll file your petition and won’t see the judge unless a creditor objects. If you file under Chapter 13, you might have to appear before the judge before you meet with the court trustee. With this type, you’ll be required to work out a repayment plan.
What Are The Advantages Of Filing Bankruptcy?
This process was created to give consumers a way to start over. You get relief from financial stress. Depending on how you file, you can quickly begin to rebuild your credit. Some other benefits include:
- Grants an automatic cessation of debt collection actions
- Collectors can’t call or send you letters
- You’re protected against wage garnishment
- Any foreclosure or property repossession action is halted
- Some property is exempt from collection
- Most of your debt is discharged
There’s a trade-off, though. Most credit card issuers will cancel your account once you file. Moreover, when you apply for a loan in the future, you might not be offered the best financing terms.
Are There Alternatives To Bankruptcy?
If you’re drowning in debt, you may think that filing for this legal proceeding is your only option. In some cases, it might be the only solution. However, alternatives should be considered thoroughly before taking this direction:
- Negotiate: Negotiating with your creditors should be your initial approach. It’s something you need to do as soon as you start encountering trouble making the payments. Loan companies prefer to work out a repayment or debt settlement plan. Collection action is expensive, and at the end day, they prefer to be repaid than see you default on the balance
- Debt consolidation loan: If your primary challenge is that you have too many accounts and miss payments due to lack of organization, a consolidation loan can help you get back on track. You could also save money if a lower interest rate is available compared to what you’ve been paying. In other words, this loan makes your outstanding balances more manageable
The Bottom Line
Even though it’s not a legal proceeding anyone wants to go through, there are many advantages of filing bankruptcy. For instance, it lets you start anew. When the stress of unpaid bills is removed, you’ll be able to evaluate what went wrong.
You can develop healthy financial habits and start rebuilding your credit. It’s essential to understand the two different types of bankruptcies before moving forward. Seeking legal counsel is critical to ensuring that your filing is successful.