Who Declares Bankruptcy?
People and businesses who file for bankruptcy have far more debt than they can pay, and they don’t see this changing anytime soon.
The bankruptcy process can also be used as a financial planning strategy when debts cannot be repaid in full but need to be restructured to allow you to pay them back. Structured repayment plans are often used to repay mortgage arrears or taxes.
It is important to understand that, while bankruptcy is a chance to start over, it reflects negatively on your credit and future financial stability. In addition to keeping a house and car from being foreclosed or repossessed, it can stop wage garnishment and other civil actions creditors take to collect debts.
When Should I Declare Bankruptcy?
When asking yourself “Do I need to file for bankruptcy?” think carefully about whether you could repay your debts within five years. You may need to file for bankruptcy if your answer is no.
This approach is based on the idea that bankruptcy gives people a second chance, not that they will be punished forever. Bankruptcy is the solution for you if some combination of bad luck and poor decisions have destroyed your financial situation and that is not likely to change in the next five years.
You can still relieve your debt even if you do not qualify for bankruptcy. There are a number of alternatives to bankruptcy, including debt management programs, debt consolidation loans, and debt settlements. The majority of these options take 3-5 years to resolve, and none of them guarantee you will be free from debt when you’re done.
Why Should I Declare Bankruptcy?
For most people, bankruptcy is what they have to do if they are drowning in debts and no one can help them – not their bank, not online lenders, and not their family and friends.
In the aftermath of the COVID-19, there is some hope for those who lost their jobs or businesses due to bankruptcy. In many cases, they still had bills to pay and had no method of paying them. This is what bankruptcy is meant to address. It was designed to provide people with a way to regain their financial footing and gain back their peace of mind.
The best, most legal, and safe way to discharge your debts when your bills have grown to levels you can’t handle is through bankruptcy.
How Do I File for Bankruptcy?
An individual can file for bankruptcy to reduce, restructure, or eliminate their debts. However, the bankruptcy court decides whether that is possible. Bankruptcy can be filed on your own, or by hiring a lawyer, which most experts recommend.
Attorney fees and filing fees are included in bankruptcy costs. Whether you file by yourself or through an attorney, you will still be responsible for paying filing fees. There may be free legal services available to you if you cannot afford to hire an attorney. Find resources and information from the American Bar Association if you are looking for an affordable bankruptcy lawyer or free legal services.
To prepare for bankruptcy, it is critical that you educate yourself about the process. This process extends beyond simply telling a judge “I’m broke!” and letting the court decide. Businesses and individuals must follow a process – a process that is sometimes confusing, sometimes complicated.
The steps to declare bankruptcy include:
- Prepare your financial records: Make a list of your debts, assets, income, earnings, and expenses. This allows you, the people helping you, and eventually the court, to better understand your situation.
- Credit counseling: Before you file for bankruptcy, you must attend credit counseling. By doing so, you are assuring the court that all other options have been exhausted before filing for bankruptcy. The counselor must be from an approved provider listed on the U.S. Courts website. A certificate of completion must accompany your paperwork once the credit counseling is complete, and you can usually get this done online or over the phone. Without it, your application will be denied.
- File the petition: Now might be a good time to hire a bankruptcy lawyer. Individuals filing for bankruptcy do not have to hire legal counsel, but if you represent yourself, you are taking a serious risk. Understanding federal and state bankruptcy laws is crucial to successfully navigate your case. Judges and court employees are prohibited from offering advice. The Chapter 7 and Chapter 13 forms are also very different, so you should know these differences when deciding which chapter to use. When you fail to follow the proper court procedures and rules, you could negatively affect your case outcome. In addition, without legal advice, you run the risk that a bankruptcy trustee will seize and sell your property.
- Meet with creditors: After you file for bankruptcy, a trustee is assigned to your case who arranges a meeting with your creditors. While creditors are not required to attend, you are. You and the court trustee will be able to answer their questions about your case during this meeting.
What Type of Bankruptcy Should I Declare?
There are various types of bankruptcy that individuals, married couples, and even businesses can file. Chapter 7 and Chapter 13 are the most common.
Chapter 7 Bankruptcy
If you have few assets and low income, Chapter 7 bankruptcy is generally your best option.
A chapter 7 bankruptcy can free you from the obligation to repay unsecured debts by obtaining a court judgment. You might also be allowed to keep assets that come under the definition of an “exempt” asset. You will be required to sell non-exempt assets to repay your debt.
Chapter 7 bankruptcy means that a majority (or all) of your debts are discharged, so you won’t have to repay them anymore. The bankruptcy court will not discharge alimony, child support, some types of unpaid taxes, or some types of student loans.
Property exemptions vary from state to state. Depending on your state, you may choose to follow either state law or federal law, which may allow you to keep more possessions.
Examples of exempt property are some equity in your home, a car, equipment you use at work, Social Security checks, retirement benefits, veterans’ benefits, and welfare checks.
These things can’t be sold or used to repay debt. Due to the wide variety of exempt property from state to state, there is no universal list of exempt property. In order to determine if your property is exempt in your state, you should consult legal counsel before filing for bankruptcy.
The term non-exempt property includes things like excess cash, bank accounts, stock investments, coin or stamp collections, a second home or car, etc. In bankruptcy, your non-exempt property can be liquidated – sold by a trustee appointed by the court. Your creditors will be repaid as much as possible with the proceeds of the sale if money allows, including the trustee, administrative fees, and any other expenses.
Bankruptcy under Chapter 7 remains on your credit report for ten years. Initially, your credit score will be negatively affected, however, as you rebuild your finances, it will likely improve.
When someone files for Chapter 7 bankruptcy, they will be subject to the Bankruptcy Court’s Chapter 7 means test, designed to eliminate those who might be able to partially repay what they owe by restructuring their debt.
The means test compares the debtor’s income for the previous six months to the median income in their state (50 percent higher or lower). A debtor who earns less than the median income would qualify for bankruptcy under chapter 7.
In the event that it’s higher than the median, there is a second means test that may still qualify you for a Chapter 7 bankruptcy. To determine your disposable income, the second means test compares your income to essential expenses (rent/mortgage, food, clothing, and medicine). In the case of a low disposable income, you may be entitled to Chapter 7 bankruptcy.
A bankruptcy judge is unlikely to allow a Chapter 7 filing if the debtor has enough money coming in to gradually pay off the debts. Higher incomes make Chapter 7 filings less likely, whereas high debt ratios make Chapter 7 filings more likely.
In order to file for bankruptcy, you will have to pay filing fees and lawyer fees. There are some people who may not qualify for Chapter 7 bankruptcy due to high income, while other people cannot afford the fees and expenses associated with the process.
Bankruptcy may be filed more than once as long as the waiting period has ended. A bankruptcy filed under Chapter 7 is subject to an 8-year waiting period starting from the date you filed.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy involves paying back some debts so that the remaining ones are forgiven. This is an option for people who do not want to give up their property or who are not eligible for Chapter 7 bankruptcy due to their high-income levels.
Only individuals whose debts do not exceed a certain amount are eligible to file chapter 13 bankruptcy. In 2021, an individual’s unsecured debt could not exceed $394,725 and secured debts had to be less than $1.184 million. For the most up-to-date information, contact a lawyer or credit counselor.
Chapter 13 requires you to design and implement a repayment plan for your creditors over a 3-to-5 year period. Your remaining debts are erased when the plan is successfully completed.
Despite their best intentions, most people fail to complete their plans. When this occurs, debtors may decide to file for Chapter 7 bankruptcy. Creditors may also retry to collect the full amount owed if the Chapter 13 repayment plan is not successfully completed.
Chapter 11 Bankruptcy
Often referred to as “reorganization bankruptcy,” Chapter 11 bankruptcy allows businesses to stay open while they pay back creditors through restructuring debt and assets.
A company may use this form if it is a large or small business, a partnership, or in some rare cases, an individual. However, it is most commonly used by large corporations. Business operations continue during bankruptcy proceedings, but most decisions are subject to court approval.
Who Bankruptcy Doesn’t Help
There are some financial obligations that can not be erased by bankruptcy.
Debts and obligations not discharged include:
- Federal student loans (unless you meet very strict requirements)
- Alimony and child support ordered by the court
- Post-bankruptcy debt
- Obligations incurred in the six months before declaring bankruptcy
- Certain taxes
- Fraudulent Loans
- Intoxicated driving accidents and debts
- Additionally, it does not protect those who co-signed your debt. In the event you didn’t or couldn’t pay your loan, your co-signer agreed to cover it. A co-signer may still legally be responsible for part or all of your loan when you declare bankruptcy.
What Are My Bankruptcy Alternatives?
In most cases, people consider bankruptcy only after attempting to pay down their debts, consolidate their debt, or settle their debts. If none of these options are feasible, low-cost bankruptcy might be the next best step.
The purpose of debt management is to reduce interest rates on credit card debts and come up with affordable monthly payments to pay them off. This service is provided by nonprofit credit counseling agencies.
The purpose of debt consolidation is to help you make payments on your debts on a regular basis and in a timely manner.
The goal of debt settlement is to reduce your balance with your creditors. A settlement of a debt is often reflected as a negative item on your credit report, like bankruptcy.
Consult with a lawyer before making a decision to determine what your best course of action is.