Thinking bankruptcy? Think again.
Sometimes, desperation leads us to thinking bankruptcy could be a solution to their financial situation. I want to emphasize, this should only be your last resort after you’ve fully understood the implications. For example, in bankruptcy you may be required to sell many of your assets to pay off your creditors. You'll take a big hit on your credit score, and bankruptcy can follow you for up to 10 years - making it difficult to purchase a house, a car, or sometimes get a job. You also may be required to meet with the people you owe money to and live under a court-ordered budget for up to 5 years. And that's just for starters.
What is Bankruptcy?
Bankruptcy is a legal process that offers a means for borrowers who have amassed too much debt to either discharge it or enter into a plan to repay their obligations. Most bankruptcies filed in the Unites States are either Chapter 7 or Chapter 13. Chapter 11 deals with debt reorganization normally used by a business or partnerships and we will not discuss it here. Before filing for Chapter 7 or Chapter 13 bankruptcy, you are must complete credit counseling with an agency that has been approved by the United States Trustee's office. It is also very important to consult an attorney and personal financial advisor before you take any action.
Chapter 7
This bankruptcy is appropriate for low income debtors with little or no assets who want to get rid of their unsecured debts. It is a liquidation bankruptcy aimed at erasing unsecured debt such as credit cards and medical bills.
To qualify you must have little or no disposable income. If you make too much money, you may be required to file a Chapter 13 bankruptcy which we’ll discuss next. When you file, a trustee is appointed to administer your case. In addition to reviewing your bankruptcy papers and supporting documents, the trustee’s job is to sell your nonexempt property to pay back your creditors. If you don’t have any nonexempt assets, your creditors receive nothing. Exemption statutes generally permit the debtor to keep such things as a home, a car, and personal goods like clothes.
Chapter 13
With a chapter 13 bankruptcy, individuals pay an agreed-upon monthly amount to an appointed impartial trustee, consolidating debts into one monthly amount. The trustee then distributes the money to the filer’s creditors, and the debtor doesn’t have any direct contact with creditors.
With a Chapter 13 bankruptcy, you would start a reorganization of your finances under the supervision and approval of the courts. As the debtor, you must submit and follow through with a plan to repay outstanding creditors within three to five years. In most circumstances, the repayment plan must provide a substantial payback to creditors - at least equal to what they would receive under other forms of bankruptcy. Individuals pay an agreed-upon monthly amount to an appointed impartial trustee, effectively consolidating debts into one monthly amount. The trustee then distributes the money to the filer’s creditors, and the debtor doesn’t have any direct contact with creditors.
Pros of Bankruptcy
You are given a new financial start.
When you file Chapter 7 or 13, all collection efforts must stop.
Your debts are satisfied and creditors excuse most unsecured debts.
Your home, car, and other basics may be protected.
Salaries you earn after bankruptcy go to you, not creditors.
From bankruptcy filing to relief takes about 3-6 months.
Cons of Bankruptcy
A bankruptcy will stay on your credit report for up to 10 years.
It may be difficult to get credit for a home, car, and more.
Requires giving up your existing credit cards.
You will lose any property not exempt from sale by a trustee.
Doesn't forgive student loans, tax debt, alimony.
Debt option of last resort that can be embarrassing
Bankruptcy Summary
Before 2005, if you had filed for bankruptcy, you could choose the type of bankruptcy you preferred. Most elected to file Chapter 7 straight bankruptcy (liquidation) over Chapter 13 (structured repayment). However, rules enacted in 2005 now requires those filing Chapter 7 to pass a "means test" – to qualify. They must earn equal to or less than the average monthly income for a family of their size in their state. In addition, before you can file for Chapter 7 or Chapter 13 bankruptcy, you are required to complete credit counseling with an agency approved by the United States Trustee's office.
While bankruptcy is an option that has been able to provide a fresh start for many individuals, families, and businesses – it is a serious decision that should be carefully considered with the assistance of a financial advisor or attorney.
As an instructor in the business community for over 20 years, offering virtual and/or hybrid classes has provided the most success to my students. All my course offerings are available in-person in the tri-state area or virtually throughout the U.S. Despite how you choose to participate, there is one common thread: instructor/student interaction.
For more information about my course offerings check out What We Do or contact me to schedule your next class.