Declaring Chapter 7 bankruptcy may seem like a drastic step to stop debt collectors and the last thing you want to do. To file, you can use one of the largest bankruptcy firms in the United States such as Recovery Law Group or you can look at other avenues.
However, there are times when it can be your best path out of debt, but considering the pros and cons is important. For example, filing for bankruptcy may be a good idea if you are:
- So deeply in debt that there is no way you can possibly pay off what you owe given how much you can afford to pay every month.
- Being threatened with foreclosure. Although declaring Chapter 7 bankruptcy won’t guarantee that you’ll be able to keep the property you are at risk of losing, it will stop the foreclosure process and buy you time to figure out what to do next.
- Worried that your car may be repossessed. Bankruptcy will halt the process and give you an opportunity to determine if there is a way that you can keep your vehicle.
- Being threatened with a lawsuit over a debt. Bankruptcy will halt the lawsuit.
- At risk of having your wages garnished to pay a debt. Filing for bankruptcy can stop the garnishment. Bankruptcy won’t stop wage garnishment for court-ordered child support, most student loans or past due federal taxes, however.
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How Do I Know If Bankruptcy Is Right For Me?
Firstly, you can try taking a “should I file bankruptcy quiz” to help you determine the cost, pros and cons and alternatives.
Next, you should always decide whether or not to declare personal bankruptcy with the help of an experienced consumer bankruptcy attorney. The attorney will evaluate your finances to help you determine if there is a way you can avoid filing and will also advise you about whether the federally-required bankruptcy means test qualifies you to file a Chapter 7 debt liquidation bankruptcy or if you must file a Chapter 13 bankruptcy of reorganization of debt bankruptcy instead.
You may want to understand Chapter 7 bankruptcy income limits. One of the most common questions are, “How much does it cost to file bankruptcy?” Many people consider bankruptcy as too expensive, but thankfully many bankruptcy attorneys do take payment plans to help you find the debt relief.
The bankruptcy attorney will also explain the filing for bankruptcy process, including telling you about all of the financial information he will need from you to fill out the various bankruptcy forms that must be filed with the court to begin your bankruptcy. The attorney will also help you keep as many of your assets as possible. In bankruptcy, certain kinds of assets are exempt, which means that they cannot be taken from you.
Each state generally has bankruptcy exemptions that will help you protect your assets. In a Chapter 7 bankruptcy, you may be at risk of losing belongings if your belongings exceed the exemptions for that state. For example, let’s say you own a home with an equity amount of $200,000. If your state’s homestead exemption is $100,000, you may be at list of losing your home in a Chapter 7 bankruptcy. Many individual may consider Chapter 13 bankruptcy to protect their home or a bankruptcy alternative.
Read: What Can They Take From Me If I File For Bankruptcy?
Should I file Chapter 7 or Chapter 13 Bankruptcy?
According to this video, if you file Chapter 13 bankruptcy, you will have between 3 and 5 years to pay off all or some of your debts according to the terms of the debt reorganization plan your attorney will prepare for you. The bankruptcy court must approve the plan and once it does, the court will supervise your plan until you complete it.
Once you’ve completed your plan, most – but not necessarily all – of your remaining debts will be discharged, or forgiven. However, certain kinds of debts will survive your bankruptcy and so you will still owe them once you are out of bankruptcy. These debts, which are described as being nondischargeable may include your mortgage, your alimony or child support obligation, most types of taxes, most government funded or guaranteed educational loans, debts you incurred because of fraud, embezzlement or property theft or because you provided false information to the court, debts you owe because you willfully and maliciously injured someone, as well as any criminal fines or restitution you may owe.
If you file Chapter 7 bankruptcy, most of your debts will be discharged, or wiped out, and your bankruptcy will probably be over fairly quickly. However the same kinds of debts that cannot be discharged in Chapter 13 are also non-dischargeable in Chapter 7 and so you will still owe them.
An important drawback to filing Chapter 7 is that in exchange for having most if not all of your debts erased, you may lose some of your assets – your nonexempt assets. The trustee in your bankruptcy will sell the assets and use the sale proceeds to pay your debts. You can think of the trustee as someone who administers the bankruptcy case. However, most people who file for Chapter 7, don’t lose anything because they don’t own any non-exempt assets. When you have no non-exempt assets and you file bankruptcy, your case is referred to as a no-asset case.
If you have nonexempt assets that you don’t want to lose, you should file a Chapter 13 instead of a 7. Again, this is something the bankruptcy attorney can help you figure out.
How to File For Bankruptcy
Understanding the process to file bankruptcy is hugely important. The process to file Chapter 7 bankruptcy is pretty straightforward starting with whether you are going to hire a consumer bankruptcy attorney.
#1: Talk with a Consumer Bankruptcy Attorney
Set up a free initial evaluation with a bankruptcy attorney to find out what kind of information the bankruptcy attorney will need to determine whether you are a good candidate for bankruptcy. Among other things the attorney will need to know about all of your debts and all of your assets as well as your monthly income and expenses.
If filing for bankruptcy is a good option for you, you must provide the attorney with all of this information before he can begin your bankruptcy. He will use it to complete all of the required bankruptcy forms. Also the attorney will use some of the information to apply a “means test” to your finances. The means test is a federally required formula that determines whether filing a Chapter 7 bankruptcy (a liquidation bankruptcy) is an option for you, or whether you must file a Chapter 13 reorganization bankruptcy instead.
When you talk with the attorney, he will also explain the difference between an exempt asset (one that you can keep in bankruptcy) and a nonexempt asset (one that you may lose) and he will help you determine which assets you will exempt in your bankruptcy.
Your goal in declaring personal bankruptcy will be to hold on to as many of your assets as possible and to get rid of as must debt as possible at the same time.
#2: Talk with a Credit Counseling Agency
If you decide that you want to file for bankruptcy, the federal bankruptcy law requires that you complete a counseling session with a federally approved credit counseling agency during the 180 days prior to the date that your bankruptcy will begin. The agency will look at your finances to help you figure out if you can avoid bankruptcy by repaying your debts through a credit counseling program.
(There are some exceptions to the credit counseling requirement. For example, you may be able to get it waived if you need to file bankruptcy right away to avoid the loss of your home in a foreclosure or the repossession of your car.)
After you have completed your counseling session, you will receive a Certificate of Compliance, which you must provide to your attorney.
#3: File for Bankruptcy
To begin your bankruptcy, the attorney will fill out your bankruptcy petition as well as numerous other required legal bankruptcy forms, including a Schedule of Debts and a Schedule of Assets. These forms must be completed file Chapter 7 bankruptcy or Chapter 13. You will be expected to provide your attorney with all of the information he needs to fill out your Chapter 7 bankruptcy forms or your Chapter 13 bankruptcy forms.
Your attorney will file all of the completed forms with the federal bankruptcy court in your area and pay a filing fee. Once that happens, your bankruptcy will officially begin.
Do It Yourself Bankruptcy
If you have little or no money, a “do it yourself bankruptcy” or filing bankruptcy online may seem like a good way to save money. Watch out! If you want your bankruptcy to go well, you really need the help of an experienced consumer bankruptcy attorney. Here’s why:
- A bankruptcy attorney may be able to help you avoid bankruptcy. Depending on the details of your financial situation, the attorney may suggest that you consider another option for getting out of debt rather than filing for bankruptcy.
- Bankruptcy is a very complicated legal process. The federal bankruptcy law and the rules that govern the process are complex and confusing. Trying to understand and comply with them is likely to only make your situation more stressful than it already is.
- Mistakes can be costly. If you mishandle some aspect of your bankruptcy or miss a deadline, which is apt to happen if you act as your own attorney, you may lose assets you might have been able to keep if you were working with an attorney, or you may be denied a discharge of your debt. When debt is discharged it’s erased – you don’t have to pay it. Also, it’s possible that your bankruptcy might get dismissed, which would put you at the mercy of your creditors and debt collectors again.
- You could be charged with bankruptcy fraud. You will have to complete many detailed financial forms to begin your bankruptcy, and if you don’t fill them out correctly some of your debts may not get discharged. It’s even possible that because of an innocent mistake you make when you complete the forms, you could be accused of bankruptcy fraud — a serious offense!
- You may do things prior to the start of your bankruptcy that will affect its success. There are certain actions you should not take during the months prior to filing for bankruptcy. If you take them, your actions could affect how much of your debt gets discharged and you might even be accused of fraud. A bankruptcy attorney will warn you about what you should not do prior to filing. The attorney will also suggest strategies and options that could help you keep more of your assets and save you money in the long run.
- Once your bankruptcy begins, you may have to deal with creditors and collectors who want you to pay what you owe. As soon as your bankruptcy paperwork is filed with the court, an automatic stay is issued, which requires creditors and collectors to stop trying to collect from you. Sometimes however, a creditor or collector will ignore the automatic stay. If that happens and you are acting as your own bankruptcy attorney, you will have to deal with that creditor or collector at the same time that you are trying to get through the bankruptcy. Trying to do both could make an already stressful situation even more stressful.
- You may be legally out-gunned. If you file a Chapter 13 reorganization bankruptcy, you must prepare a written plan that explains exactly how you will handle each of your debts, and the court must approve your plan. Getting that approval will require that you work closely with the bankruptcy trustee who has been assigned to your case and you may also have to negotiate with your creditors if they don’t like what your proposed plan says you will do about the money you owe to them. The creditors will be represented by their attorneys during the negotiations — attorneys who understand the ins and outs of bankruptcy and who have been involved in similar negotiations before. So you will be at a serious disadvantage if you try to file a do it yourself bankruptcy.
- You don’t know how things work. Different bankruptcy courts tend to have slightly different rules. Bankruptcy attorneys who practice law in a particular court know its rules and how to use them to benefit their clients as well as how to get around the rules. The attorneys also have established relationships with the judges in the court where they practice as well as with the trustees and with the attorneys who represent creditors in a bankruptcy. Those relationships can work to the advantage of the attorneys’ clients. If you act as your own attorney however, you won’t know the rules nor will you have relationships with any of the players in your bankruptcy.
After You File For Bankruptcy
Let’s talk about the process just after filing bankruptcy.
Your bankruptcy will begin as soon as your attorney has filed your bankruptcy petition and other legal paperwork with the court. Once that happens, the court will issue an automatic stay requiring creditors and debt collectors to stop trying to collect from you.
However, there are exceptions to the automatic stay. For example, efforts to collect any past due child support or spousal support you may owe can continue. The automatic stay will remain in place while you are in bankruptcy.
Once you have filed, the court will assign a trustee to your case. The trustee will probably be an attorney who is in private practice, or an accountant. Although some of the trustee’s responsibilities will depend on whether you file Chapter 7 or Chapter 13 bankruptcy, the trustee will do the following regardless of which type of bankruptcy you file
- Make sure that the information on your bankruptcy forms is complete and accurate.
- Ensure that your creditors are paid as much of what you owe to them as possible through your bankruptcy.
- Run your creditors meeting, also referred to as a 341 meeting of creditors, which will probably occur about six weeks after your bankruptcy has begun. You must attend this meeting to answer any questions your creditors may have about your assets and debts and about anything else relevant to your bankruptcy. Typically however, your attorney will work out any issues your creditors may have with your bankruptcy before this meeting happens and so it’s unlikely that any of them will show up.
It’s also possible that the trustee will ask the court to dismiss your bankruptcy if he or she believes that you’ve abused the process in some way. Should your bankruptcy end, you will no longer be protected by the automatic stay and so you will be at the mercy of your creditors and debt collectors again.
If You File for Chapter 7 Bankruptcy
If you file for Chapter 7 bankruptcy, the trustee will take control of all or most of your nonexempt assets — if there are any — sell them, and use what they get from the sale to pay your creditors. Once that has happened, the court will discharge any debts that may remain except for those that the bankruptcy law says cannot be erased, or any debts that you’ve formally agreed to continue paying according to the terms of your original contracts with the creditors to whom you owe the money. (When you agree to continue paying a debt, you are described as having reaffirmed the debt.) After the discharge, which usually happens about 120 days after your Chapter 7 bankruptcy began — your bankruptcy will be over.
Read What Can They Take From Me if I File for Bankruptcy? to learn more about exempt and non-exempt assets.
After You File for Chapter 13 Bankruptcy
After you file a Chapter 13 bankruptcy, you and your attorney will prepare a Chapter 13 reorganization plan. The plan will detail exactly how you will pay off your unsecured debts (credit card debt and medical debt, for example) during the 3 to 5 years that you will be in bankruptcy. Most likely you will pay less than the full amounts that you owe on those debts.
Although you can reduce the amounts that you must pay on most unsecured debts, you cannot do the same thing when it comes to your secured debts – your mortgage or car loan, for example. If you want to hold on to those assets, you must pay the full amounts that you owe on them.
However, while you are in Chapter 13 bankruptcy, you can catch up on any missed mortgage payments through your plan, although you will have to stay current on your mortgage payments at the same time. Also, if you are behind on your car loan, you can put the entire loan balance in your plan and you will get title to the vehicle once you’ve completed your plan.
Your creditors will have an opportunity to review your plan and object to aspects of it and you may be required to revise the plan before the court will approve it. Once that happens, you’ll be responsible for living up to all of the plan’s requirements while you are in bankruptcy, and you’ll be protected by the automatic stay as long as you do.
If you believe that you are going to have problems living up to the terms of your plan once you’ve begun paying on it, let your attorney know right away. You may be able to modify the plan.
Finally, after you receive your discharge, you are ready to rebuild your credit score and credit report. There are a number of things you can do that may help including (but not limited to) checking your credit report for errors and applying for new lines of credit.