Financial distress can come to your life for many reasons at many unexpected times. When these do happen, you may or may not have to take extreme measures to come to a resolution. Bankruptcy is likely your last resort to conquer that last financial hurdle. The term typically scares a lot of people. However, depending on where your financial situation lies this may be your best option to overcome your financial issues. So what exactly do you need to know about bankruptcy? How do you maneuver this process with as minimal stress as you could? Who should you be speaking to and asking for help? Are there any reputable credit counseling services that can help you through this process? These are some of the questions we will be answering in this post!
A debt management program is worth considering before filing for bankruptcy.
What Is Bankruptcy?
This is a process that takes place in a federal court. In that, it liquidates the assets of an insolvent debtor to further relieve the debtor of their liabilities. There are two types in which you can file for bankruptcy. Chapter 7 deals with liquidation, while Chapter 13 deals with the reorganization. Let’s dig in a little deeper into these types:
Chapter 7:
Chapter 7 bankruptcy is when the court appoints a Trustee who may liquidate or sell some things that you own to pay your creditors. Most of your debt will be canceled. However, you may choose to pay some creditors, usually to keep a car or home in which the creditor has a lien.
Chapter 13:
Chapter 13 bankruptcy is when your debt is reorganized into a single monthly payment. The payment will continue for 36 to 60 months. In no case may a plan provide for payments over a period longer than five years. You do not have to repay all of your debt. You pay only as much as you can afford. However, the minimum payment may be affected by the property you want to keep. When you complete the payments, debt not paid is discharged.
Pros & Cons:
Filing your losses and liquidating your assets is not at all your first choice. However, if circumstances do lead to this option, you must understand the advantages and disadvantages of this process. American Consumer Credit Counseling is a reputable non profit credit counseling agency that helps you with the first steps of this process. These are the advantages and disadvantages they list out:
Advantages:
- One of the most important advantages is that you can obtain a fresh financial start.
- If you are eligible for Chapter 7 most of your unsecured debts may be forgiven or discharged. A secured debt is one which the creditor is entitled to collect by seizing and selling certain assets of the debtor if payments are missed, such as a home mortgage or car loan.
- You may be able to keep (that is, exempt) many of your assets, although state laws vary widely in defining which assets you may keep.
- Collection efforts must stop as soon as you file for bankruptcy under Chapter 7 or Chapter 13.
- You cannot be fired from your job solely because you filed for bankruptcy.
Disadvantages:
- A bankruptcy can remain on your credit record for 7-10 years and can affect your future finances.
- A bankruptcy may impede your chances of getting a mortgage or car loan for some time.
- Not all debt will be discharged. Examples of debt that cannot be discharged include child support, alimony, some student loans, divorce settlements, and some income taxes. You should check with an attorney on the specific categories of debt that will be allowed for discharge.
What Should You Considerations before Filing Bankruptcy
Even a situation such as a job loss or costly medical procedure can force someone to file for bankruptcy. This sometimes is the only way they can stay in their homes or stay financially afloat. Therefore identifying the necessary considerations before filing bankruptcy is crucial.
Educate yourself on the process.
It is undoubtedly complex and overwhelming to be on this journey. Therefore, you must utilize as much time as possible to familiarize yourself with the process. You must have your expectations realistically set before getting into the deep end.
Get a good picture of your finances, including a copy of your credit report.
How does your financial portfolio look? Where do you currently stand in terms of your finances? What is your current credit score? These are crucial information to have before you begin. This process is draining. It has serious implications on your credit score and once. you do file, it will take seven years for it to recover.
Find a bankruptcy attorney.
Having a professional manage the process is key to a glitch-free process. With so much information online sometimes consumers may be under the assumption that saving on legal fees is a better bargain. However, the guidance you get from hiring an attorney far outweighs the costs. Having someone knowledgeable on your side to guide you through this process is crucial to the success of the process. An attorney can also help you avoid dismissal. This type of guidance will help you tie up all loose ends to ensure you have a fresh start post-bankruptcy.
Enroll in a pre-filing credit counseling course.
If a consumer plans to file for bankruptcy protection, they must get consumer credit counseling from a government-approved organization within 180 days before filing. This session should include an evaluation of the personal financial situation, a discussion of alternatives to bankruptcy, and a personal budget plan. On average the counseling session should last about 60 to 90 minutes.
Prepare for the financial future and how to improve your credit rating.
Financial after bankruptcy begins at ground zero. The easiest way to re-establish credit is through a secured credit card from a bank. Also, create long-term goals, such as saving for a home, to help motivate you to save.
In addition to the general must-do’s here is a step-by-step guide on how to bounce back from Bankruptcy:
- Create a budget. “A monthly budget is a must for any household. Budgets help avoid overspending and keep track of where your money is going,” says Ross.
- Set SMART goals. “That means “Specific, Measurable, Achievable, Realistic and Timely goals,” she adds. “Setting goals will help you make financial achievements.
- Rebuild credit. “Pay all your bills on time and pay more than the minimum on your bills,” Ross notes.
- Start an emergency fund. “To avoid being financially unprepared for whatever life throws at you, start an emergency fund to cover at least three-to-six (and ideally six-to-nine) months’ worth of expenses in case of the unexpected,” she adds.
- Seek financial literacy education or talk to a financial planner who can help you avoid falling back into unhealthy money habits, Ross says.
- Focus and finish. Above all, don’t act on your wants, but needs instead.
Other Clarifications About the Process
Does Bankruptcy Eliminate Debt?
Filing for bankruptcy does not mean your debts magically disappear. This process simply restructures existing debts. This leaves you responsible for all future payments. In addition to the financial commitment, you should also know that it can stay with you for up to 10 years. During this time it may be very difficult for you to obtain any type of loan. This is a public record and will be reflected on your credit report but not permanently.
Is This the Best Solution?
There are many processes and laws are surrounding this journey. Understanding this in its entirety is crucial. Apart from the research, you do by yourself hiring a qualified attorney can help you understand if this is your way to go. Depending on the severity of your financial problem you can determine if a successful debt management program can help you instead.
Bankruptcy is a complex subject altogether. However, there are plenty of organizations and experts that can help you get through this process. Understanding your situation and taking the right action is important.
Therefore, if you are in doubt you should speak with a certified debt counselor at ACCC to understand more.
