Understanding the Basics of Bankruptcy

Bankruptcy is a major decision that can also have significant benefits. Many people have misunderstandings about bankruptcy that keep them from considering it as an option, but if you are overwhelmed by debt and are struggling to see a way out, bankruptcy could be life changing for you. By understanding what bankruptcy is, what options are available, and how it can help, you can make an informed decision about whether it is the best path forward. 

What is Bankruptcy? 

Bankruptcy is a means of discharging debt. While bankruptcy does not wipe out all debts (such as student loan debts), the majority of debts, including credit card debt and medical debt, can be eliminated through this process. There are different kinds of bankruptcy, and different eligibility criteria and timelines for each one. By understanding the different kinds of bankruptcy you can determine which would be the best fit for your needs and how it would impact your life and financial situation. 

What are the Different Kinds of Bankruptcy?

If you are considering personal bankruptcy (as opposed to bankruptcy for a business), Chapter 7 and Chapter 13 bankruptcy are the relevant options. In order to be eligible for Chapter 7 bankruptcy, you must have a below-average income and insufficient assets to settle your debts. Under Chapter 7 bankruptcy, some of your assets will be liquidated in order to pay off a portion of your outstanding debts. The remainder of your debts will be forgiven. This is a relatively quick process that usually takes about five or six months. 

If you have a higher income that would allow you to enter a repayment plan to settle your debts, Chapter 13 bankruptcy is the right option for you. The court will restructure your debts and order a monthly repayment plan that will last from three to five years. Once you have completed the payment plan, your debts will be discharged. 

One of the biggest differences between these two kinds of bankruptcy is the effect that it will have on your assets. In Chapter 7 bankruptcy nonexempt assets will be liquidated. Which assets are exempt or not will be determined by the court. Under Chapter 13 bankruptcy, you are able to keep your assets, including your house and car, in exchange for entering into a repayment plan. The main determinant of which one is right for you is your income and assets. 

If you have questions about whether you are eligible to file for Chapter 7 or Chapter 13 bankruptcy, it is a good idea to consult with a lawyer in order to ensure that you are getting information that is accurate to your specific situation. 

How Do I Know Which Kind of Bankruptcy is Right for Me?

The main determinant when it comes to selecting which form of bankruptcy to file for is your current income and assets. A means test is used to determine whether you are eligible for Chapter 7 bankruptcy. In order to pass the means test, your income must be below the average income level for your state. If your income is too high to pass the means test, it indicates that you have sufficient income to make monthly payments toward your debt. This means that you will instead be eligible for Chapter 13 bankruptcy, under which you will make manageable monthly payments to the court for three or five years in order to have your debts discharged. This form of debt also allows you to maintain possession of your assets, including your home and car. 

If you have questions about whether bankruptcy is right for you or which kind of bankruptcy you are eligible for, it is a good idea to consult with an experienced bankruptcy attorney so that you can get feedback specific to your financial circumstances. 

How Will Bankruptcy Impact My Credit?

Bankruptcy is not a get-out-of-jail-free card, it is a life-raft when you are drowning in debt with no other way to get out. This is to say that there are drawbacks; it is not all benefits. The primary drawback is the impact that it can have on your credit. Bankruptcy will negatively impact your credit, however, the effect is much more temporary than most people realize. You are able to begin rebuilding your credit immediately after bankruptcy, and most people can be in good standing within a year filing the conclusion of their bankruptcy proceedings with active effort. It should also be noted, though, that bankruptcy will be visible on your credit report for seven years, but that will not keep you from being able to improve your credit score. After bankruptcy, you should be sure to do a good job of consistently monitoring your credit and making payments in full and on time. These actions will all help to rebuild your credit and keep your score in a good place.

Should I File for Bankruptcy? 

Bankruptcy is a major decision that should not be taken lightly. If there is another way for you to cope with or handle your debt, it is best to consider that other option first. Additionally, if you are filing to avoid creditor harassment, there may be other ways of resolving that issue, such as reporting the harassment or having a lawyer send a cease and desist letter to the creditor. However, if you are truly in over your head, have multiple wage garnishments, are facing foreclosure of your home, or are about to have critical property repossessed, bankruptcy may be a good option. Filing for bankruptcy will put an automatic stay on wage garnishments and creditor’s collection efforts, and these collection attempts must cease while the bankruptcy proceeding is ongoing. For many people this is a much-needed source of relief that would not be available to them otherwise. If a debt settlement agreement is reached, the wage garnishments and collection efforts should not resume after the bankruptcy proceedings have concluded. 

Contact the Bankruptcy Law Center 

If you are considering bankruptcy, you do not have to navigate the process alone. Contact the Bankruptcy Law Center to learn about your options and get the support that you need. Schedule a consultation today.