Personal bankruptcy: What to expect
Personal bankruptcy offers a way to handle overwhelming debts, and is something debt relief attorneys are experienced in managing. While the bankruptcy process may seem intimidating to some, experienced attorneys simplify it and ensure that their client is prepared every step of the way. Personal bankruptcy isn’t for every debtor, but it is worth considering, and a debt relief attorney will offer a complete picture of what to expect.
Won’t bankruptcy damage my credit?
While bankruptcy can impact your credit score, for many debtors, it’s a positive impact. Although bankruptcy itself is not a positive marker on your credit score, many debtors see a much faster recovery once bankruptcy proceedings have been underway for a year or so. How is this the case?
Most people considering bankruptcy are doing so because they can no longer manage their debts. By the time these debtors opt for personal bankruptcy, they may have already damaged their credit score. Continuing to struggle making payments will only keep your credit score down. Bankruptcy may do a bit more damage in the short term, but many, if not most, debtors turn their credit around much faster because they are paying on time and getting delinquent accounts off of their credit report. All of this is corroborated by data taken from credit bureaus and studied by Federal Reserve Bank researchers. It’s not speculation, but what actually happens with many debtors.
Personal bankruptcy, then, is one step backward, two steps forward. If your long term financial stability is the important issue, then bankruptcy may get you there faster than avoiding it due to credit score concerns.
Is personal bankruptcy right for me?
Personal bankruptcy is not the only debt relief option available to people, and it’s best to consider all your options with a debt relief attorney. However, there are some signs that bankruptcy is worth looking at. Some of those signs include:
- Many debts are unsecured – A common misconception with bankruptcy is that it wipes out all debts. That’s not true, as secured debts (such as car loan or mortgage) usually pass through bankruptcy without being touched. Those debts might be eliminated, too, if you’re willing to return the secured property, but the obligation to make payments remains if you hold onto that car or home. Student loans, tax debts, child support payments and alimony are excluded as well.Many debtors are struggling with unsecured debts like credit card bills, collections accounts and medical debt. These are usually discharged during bankruptcy, so if excess unsecured debt is the issue, then bankruptcy could provide a solution.
- There doesn’t appear to be resolution in the near future – Some debtors choose to wait out their financial issues because they have a promotion or raise coming, or because they are in line for an inheritance. For these people, it might make sense to opt for other debt relief options. Personal bankruptcy is intended for debtors who have no easy way out from under their debts, as it comes with a 10-year mark on your credit. Of course, if your credit is already in trouble, then another mark may mean little compared to the benefits of turning your situation around right away. If, though, your finances look to improve in the near future, then a debt relief attorney will likely consider alternatives to personal bankruptcy.
- The debtor passes the means test – Personal bankruptcy is not available to everyone. To qualify for it, a debtor must demonstrate quantifiable financial hardship. If the debtor’s income is well above the median and, after paying for monthly necessities, there remains enough to make payments against the debt, the debtor may not be allowed to file for bankruptcy.
It’s not always clear when personal bankruptcy is the best way forward, but many debt relief attorneys offer free consultations for this reason. You don’t have to guess at it, because an attorney can assess your situation and determine if bankruptcy, or an alternative, makes the most sense.
What personal bankruptcy options do I have?
Individuals filing for personal bankruptcy must choose between Chapter 7 and Chapter 13, and they differ considerably. Both Chapter 7 and 13, though, allow people to get out from under unsecured debts, and for many debtors, that is most important.
Here’s what both options consist of, and what kind of relief they offer:
- Chapter 7 – Chapter 7 bankruptcy is also referred to as “liquidation,” because the debtor’s assets are sold off to cover as much of the remaining debt as possible. The Chapter 7 process takes a few months to complete, and during the process, a trustee appointed by the court will manage the sale of any assets and creditor payments. Once all available assets are sold, the remaining unsecured debts are discharged.Unsecured debts include credit card and medical debt, while secured debts include car loans, mortgages and many items purchased on store accounts. Chapter 7 does not discharge secured debts, though debtors can forfeit the property secured with the debt to wipe it out. Chapter 7 also will not discharge student loans, tax debts, alimony or child support payments.Chapter 7 is ideal for debtors that have few assets, and its short duration makes it a popular choice for those that want to resolve their debts quickly. However, debtors have to qualify for Chapter 7, and to do so, they must pass a means test. In short, this means the debtor’s income must be lower than the state’s median income, though there are other considerations, such as how many dependents the debtor is responsible for, and the nature of their debts. If a debtor qualifies for Chapter 7, they can move ahead with liquidation.Fortunately, debtors can exempt much of their property from liquidation, using either the federal or state’s exemption list. Some states are much more lenient than the federal government regarding what property can be exempted, and Texas is a primary example of this. Texas, for instance, allows debtors to exempt their entire homestead, up to a generous acreage limit, a vehicle for each licensed driver in the home, and up to $100,000 of personal property. It’s not always clear what can be exempted and what cannot, and this is something that a debt relief attorney can help clarify.
- Chapter 13 – Where Chapter 7 takes a few months to complete, Chapter 13 requires three to five years. That’s because Chapter 13 is not a liquidation process, but a repayment process. Most people who opt for Chapter 13 do so because they do not qualify for Chapter 7, though there are other reasons why an individual may opt for Chapter 13 personal bankruptcy. For example, Chapter 7 isn’t much help to a debtor whose debts are largely secured, or debts arising from taxes or student loans. For these debtors, Chapter 13 is the better option.During Chapter 13 proceedings, the debtor submits a repayment plan to the court. This plan should include specifics on how each account will be paid back, and the timeline involved. Before the plan goes into effect, it must be approved by a bankruptcy trustee and all involved creditors. If there are objections, the debtor can change up the plan’s details, and once the plan appears to be made in good faith, complies with the law and is feasible, it will likely be approved.Once the plan goes into effect, the debtor must remain current on their payments, though the court may allow modifications or discharge debts entirely if the debtor suffers hardship. In general, though, debtors are expected to dedicate all disposable income to paying back creditors.If the repayment plan is met, any remaining unsecured debts are discharged. A Chapter 13 plan always prioritizes debts like child support, taxes and alimony first, then pays off secured debts. If secured debts remain once the plan concludes, payments must continue to retain the property.
Personal bankruptcy is complex, but if guided by an experienced debt relief attorney, the process will be clear and manageable.