- Declaring bankruptcy may be the only option when debt has gotten completely out of control. There are positives and negatives.
- There are different types of bankruptcy for different situations and future plans, depending on if you’re an individual or business.
- Declaring bankruptcy relieves you of all debt and financial obligations except for court-ordered penalties and fines, unliquidated debt, or damages.
- You may lose some of your possessions when you declare bankruptcy. This is a way for lenders to recoup some of the losses.
Why Might You Want To File For Bankruptcy?
People most commonly file for bankruptcy if they are so far into debt that they can’t get out. By filing for bankruptcy, people can void existing debt or get help to get out of debt. To apply for bankruptcy, debtors will have to make a petition to the bankruptcy court. They do this either as an individual, as a couple, or as a corporation. Before bankruptcy some consider an arrangement to pay.
Are There Different Types Of Bankruptcy?
The United States Bankruptcy Code outlines different types of bankruptcy, stated as different Chapters. All cases are dealt with in a federal court but the Chapter that you file for will depend on how you are filing bankruptcy (for example, for individuals there is Chapter 7 or Chapter 13 whereas for businesses they may use Chapter 11 to reorganize the company).
Am I Eligible To Apply For Bankruptcy?
There is not a minimum amount of debt that someone needs to be in before filing bankruptcy. Any outstanding debt will qualify as a possible case for bankruptcy including both secured debt (such as a mortgage) or unsecured debts (such as credit card debt or payday loans).
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy is a common way of relieving debt in the United States and can be used both by individuals or by businesses if they wish to liquidate. Those who are deep in debt can file this type of bankruptcy to start their finances from zero and erase all existing debt, including personal loans, outstanding medical bills, and credit card debt. A bankruptcy discharge from the bankruptcy court will nullify your obligation to repay these debts.
How Do You File for Bankruptcy?
What Does a Chapter 7 Bankruptcy Do?
Although filing for bankruptcy can clear the majority of debt types, you will not be cleared of certain debts including court-ordered penalties and fines, unliquidated debt, or damages.
Is It A Good Idea To File For Bankruptcy?
If you find yourself in a desperate cycle of debt, there are clear benefits to filing bankruptcy:
- Clear Your Debts
This is the main reason why people choose to file Chapter 7 bankruptcy, enabling them to wipe out the majority of their debts and start afresh. As soon as you are granted a bankruptcy discharge, you are free from the obligation of paying back your debts, including credit card debt, personal loans, medical bills or your mortgage.
Those with poor credit scores will be in a better position because any missed monthly payments or negative credit report scores will no longer appear. After filing for bankruptcy, your credit score will start from scratch and you will have the opportunity to build good credit. Additionally, you will start to receive credit card offers, meaning that you can increase your credit score from the very beginning.
- Keep Your Stuff
Under US law, there is a certain thing called “exempt property” which will allow you to protect certain belongings from creditors. Data suggests that for Chapter 7 bankruptcies, in the vast majority of cases (95%) people are allowed to keep their belongings, including jewelry, furniture, and even your car.
- Protect Yourself From Creditors
When you are in debt, you are chased and harassed by creditors with ongoing calls and letters, threats and wage garnishments. After you have filed for bankruptcy with a bankruptcy court, there is an automatic stop on collection actions against you. This means that all of the correspondence immediately stops and you’re protected from creditor threats.
Are There Any Drawbacks To Filing Chapter 7 Bankruptcy?
Bankruptcy is a drastic solution. While regularly used for clearing debt problems, it comes with certain drawbacks. Things to think about:
- You May Not Be Eligible To File Chapter 7
You have to pass the means test to prove that you do not have enough money to pay off your debt. If you have too much disposable income or money in savings, you cannot just leave your debt unpaid. However, if this is the case, you can file for Chapter 13 bankruptcy. This option helps you organize a repayment plan to pay off your debt.
- Some Debt Is Not Erased
If using bankruptcy to erase your debts, it’s worth noting that you do not clear all debt. Legally obliged payments such as alimony and child support are never cleared by filing bankruptcy. Also, any outstanding tax debts or student loans will not be completely cleared.
- You Could Lose Some Of Your Possessions
Different states will define different items as ‘exempt property’ meaning that, depending on where you are, you may lose many of your possessions during the liquidation process. Valuable items that are nonexempt property may include things such as valuable heirlooms, a second home or car, collectibles, cash, bonds, bank accounts, stocks, and other investments. Exempt property, on the other hand, will mainly cover essential items such as clothing, a car, furniture, and home equity.
- Only Clears Personal Debts
Individuals file for Chapter 7 bankruptcy – meaning that only that individual will be cleared of their personal debt obligations. If the debt is shared across multiple people, their obligation to pay will still be valid.