What You Need to Know About Bankruptcy

What You Need to Know About Bankruptcy

There is a possibility that you're probably thinking about bankruptcy or about to go bankrupt. You may think this path is a new beginning or a horrible end. But what is the truth about bankruptcy?

Bankruptcy is a legal process that a person can go through to pay off some debts they cannot pay.

If you are so heavily in debt that bankruptcy seems like your only option, you should know these three things: 

  1. There is hope, and everything will be fine. 

  2. There are other options, and you should try them before declaring bankruptcy. 

  3. Bankruptcy does not define who you are and will not be the end.

Keep these things in mind as you read the rest of this article and learn the truth about bankruptcy, including a breakdown of these specific topics:

What is bankruptcy?

Bankruptcy is a case where you tell a judge that you cannot pay your debts. The judge and trustee look at your assets and liabilities (also called what you have and what you owe) to decide whether to pay (or cancel) some of your debts. If the court finds that you don't have the means to repay your debt, you will go through the formal bankruptcy process.

What are the types of bankruptcy?

There are six different types of bankruptcy:

Chapter 7 Bankruptcy

This is the most common type for people. With Chapter 7, the court sells all your assets, with a few exceptions, so you can pay as much debt as possible. Outstanding debt is generally canceled.

Depending on the court's decision, you could lose your home (or the capital you invested in it) and your car in the process. No fixed amount of debt is required to qualify; the court only has to decide that you are not making enough money to pay your debt.

Chapter 9 Bankruptcy

Chapter 9 bankruptcy is a payment plan for cities, towns, schools, and others to pay off debts.

For specific information on bankruptcy laws in your area, talk to your local tax professional or visit the US Courts website. There you will find information about the process and where you can find help in your area. 

Chapter 11 Bankruptcy

Usually reserved for businesses, Chapter 11 creates a plan for how the business will continue to operate by paying off all debts.

Chapter 12 Bankruptcy

Chapter 12 bankruptcy allows farmers and fishers to obtain a debt payment plan to avoid foreclosure on their property.

Chapter 13 Bankruptcy

Chapter 13 is a method of bankruptcy for people in which the court approves a plan to pay off one or all of their debts in three to five years. You can keep your assets and have time to update your mortgage. You agree to a payment plan and must adhere to a strict court-supervised budget. (There is no confidentiality in bankruptcy.)

You can declare Chapter 13 bankruptcy if your unsecured debt is less than $419,275 and your secured debt is less than $1,257,850.

Chapter 15 Bankruptcy

International bankruptcy cases are dealt with in Chapter 15.

How does bankruptcy work?

Bankruptcy is awful. If you can avoid it, avoid it. But, if you can't avoid it for whatever reason, here is a quick overview of how to declare bankruptcy and what documents you need to prepare for it.

How to declare bankruptcy

Talking to an attorney first eliminates these processes as they help you navigate this. But for information purposes, these are the steps you need to take.

  • Find out what type of bankruptcy you should file.

  • Assemble and organize the necessary documents.

  • Take a credit counseling course.

  • Complete bankruptcy paperwork.

  • Make sure you have your fees (attorney and filing).

  • Print the bankruptcy document.

  • File bankruptcy paperwork.

  • Send all necessary documents to the bankruptcy administrator (the person appointed by the court to handle your file).

  • Meet with this administrator at a 341 meeting (or meeting of creditors).

  • There is a training course for debtors.

  • Complete the bankruptcy process (depending on the type of bankruptcy you filed).

  • Rebuild your life; I know you can get out of this!

What documents do you need to declare bankruptcy?

There are many documents, forms, and paperwork involved in a bankruptcy, but let's talk about what you need to gather at the start:

  • Account statements

  • ID (for example, valid photo ID and proof of social security number)

  • Income documents (such as last six months' payment slips, last two W-2 forms, and proof of any additional sources of income, such as rent or social security)

  • Mortgage information (such as an appraisal, mortgage payment statements, and possibly a deed of trust and proof of home insurance)

  • Retirement Information

  • Tax returns for the last two years (for Chapter 7) or the last four years (for Chapter 13)

  • Vehicle information (such as proof of the value of your vehicle, any car loan statements, and possibly a copy of your registration and proof of car insurance)

  • Other documents showing other debts or expenses, such as child support or alimony

Yes, that's a lot. Bankruptcy is not an easy way out! Your state or court system may also require more. This requires a lot of patience.

What happens if you declare bankruptcy?

If you declare bankruptcy, your creditors must stop all attempts to collect money from you, at least temporarily. Most creditors cannot write to you, call you, or sue you after you file your claim. But even if you go bankrupt, the courts can ask you to pay certain debts. Each bankruptcy case is unique, and only one court can decide the details of its bankruptcy.

Let's talk a bit about what covers bankruptcy and what doesn't:

What does bankruptcy cover?

Bankruptcy can prevent garnishment of wages, repossession of property, or foreclosure. Wage garnishment is when a court orders that part of your paycheck be sent directly to your creditor without you seeing the money. Bankruptcy eliminates many, but not all, of your debts.

What is not covered by bankruptcy?

  • Expensive items purchased shortly before bankruptcy, such as cars, boats, or jewelry

  • Pension and alimony

  • Public debt, such as taxes, fines, or penalties

  • Student loans

What are the effects of filing for bankruptcy?

Let's not sugarcoat it: Bankruptcy has a huge emotional impact on a person. It's up there with divorce, the loss of a loved one, and business failure. In addition to the emotional impact, here are other effects of filing for bankruptcy:

  • Bankruptcy affects your credit score: We're not in favor of credit scores, but it's important to know that bankruptcy affects your FICO hard, and it lingers. Chapter 13 bankruptcy stays on your credit report for about seven years, and Chapter 7 bankruptcies stay there for 10 years.

  • Bankruptcy does not cancel all debts: We've talked about this a bit before, but filing for bankruptcy doesn't make all your problems go away, and it doesn't make all your debts go away. Most student loans, alimony, child support, reaffirmed debt, unpaid taxes, government debt, or court fines are not issued in bankruptcy.

  • Buying a home can be difficult after bankruptcy: Unless you're paying cash for a home, it can take one to four years to qualify for a home loan.

  • Filing for bankruptcy is expensive: Chapter 13 bankruptcy filings will cost around $310 plus attorney fees, which can range from $3,000 to $30,000. For a Chapter 7 bankruptcy, you will pay $335 for filing fees and $1,500 to $3,000 for an attorney.

  • Your bankruptcy claim becomes public knowledge: Your name and other personal information will appear in court records for public access. Potential employers, banks, customers, and businesses can access your bankruptcy details.



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