Wondering how bankruptcy works? This post should help. The legal process known as bankruptcy is overseen at the federal level by United States bankruptcy courts. The purpose of bankruptcy is to help businesses and individuals reduce or eliminate a portion of or their debt enabling them to at least pay back some of the money they owe, and to reduce debt burdens to allow future growth.
Although bankruptcy may help you obtain some relief from your outstanding debts, it will have negative impacts in other areas of your life. For example, it will reduce your chances of successfully opening credit card accounts as well as getting favorable rates on loans, and your credit report will show your bankruptcy for seven to ten years.
The Basics Of Bankruptcy
Bankruptcy is not something you want to endure alone. A good bankruptcy attorney can make sure the process runs as directly as it can and will ensure compliance with all the applicable regulations.
Certain requirements have to be met before you can start bankruptcy filing. You will have to do the following:
- Go through a complete credit counseling course using a credit counselor who is government approved – they will complete an assessment of your personal finances and discuss bankruptcy alternatives. They will also assist you in creating a personalized budget.
- Decide whether to file Chapter 7 or Chapter 11 or 13 bankruptcy. Although all bankruptcies can assist in eliminating the debt that is unsecured, halt repossession or foreclosure, terminate garnishment of wages, debt collection actions and utility shutoffs – you will be expected to cover the court costs and attorney’s fees. It is important though to understand how Chapter 7 and Chapter 13 resolve debt issues.
How Chapter 7 Bankruptcy Works
Commonly known as “Straight bankruptcy” – a United States Trustee directly supervises the sale of any assets that are not exempt from the bankruptcy (basic house furnishings, cars, and work-related tools may be exemptions). Oversight by the Trustee is a mandatory procedure, and the proceeds from any asset sales go toward paying off your creditors. The balance of what you owe is then eliminated once the discharge of the bankruptcy has occurred. There are some debts Chapter 7 bankruptcy is unable to discharge at any time. Examples would include unpaid taxes, student loans, child support, and alimony also known as spousal maintenance. Consider the consequences of Chapter 7 bankruptcy. It is very likely you will lose most of the property you own, and a notice of the procedure will remain on your credit report for up to ten years following the filing date. Plus, you will not be able to file Chapter 7 bankruptcy for another eight years should you accumulate debts again.
Learn more about Chapter 7 Bankruptcy
How Chapter 13 Bankruptcy Works
In return for completely paying or paying a portion of your outstanding debt, Chapter 13 allows you to keep most of your property. A repayment plan of three to five years will be negotiated through your attorney and the bankruptcy court Trustee assigned to your case. When you have paid the money owing under the plan, the balance of the debt is discharged even if you have only repaid some of the money you originally owed. Chapter 13 bankruptcy will still hurt your credit but less so than Chapter 7. As you repay some, maybe all, of your outstanding debts, you will have some assets retained. Further, Chapter 13 bankruptcy will only show on your credit report for seven years, and if needed, you can refile Chapter 13 in just two years. People within a Chapter 13 plan send just a single check to the U.S. Trustee each month, who then routes those monies proportionally to the various creditors owed.
Learn more about Chapter 13 Bankruptcy
Definitions of Common Bankruptcy Terms
- Unsecured Debt: Credit cards are an excellent example of unsecured debt. Basically, the creditor does not hold any tangible assets or collateral to secure the debt.
- Secured Debt: This is where the creditor holds tangible assets or collateral to secure the debt. An auto loan or mortgage on a home are two examples. If the loan defaults, the creditor can seize the vehicle or home.
- Reaffirmed Account: This is when you make an agreement to continue the payment of a debt that may be discharged in Chapter 7 bankruptcy proceedings. The reaffirmation of the account and your agreement to pay the debt is usually done with the purpose of allowing the debtor to maintain a piece of collateral, a vehicle, for example – that may otherwise be seized as a standard part of the bankruptcy process.
- Means Test: Under Chapter 7 Bankruptcy a means test is mandatory to demonstrate to the bankruptcy courts a debtor has no means to repay their debts. The means test assesses things like assets, income, unsecured debt and expenses. When a debtor fails the means test, the Chapter 7 bankruptcy may be dismissed, or they may choose to start proceedings for Chapter 13 bankruptcy.
- Liquidation: When the non-exempt property of a debtor is sold – the proceeds are then paid to their creditors via the U.S. Trustee’s office.
- Lien: A legal procedure where a creditor can take, hold and/or sell real estate previously belonging to the debtor as security for debt repayment.
- Discharged Bankruptcy: Discharged refers to when the bankruptcy procedures have been completed and certain debts are literally extinguished forever. In Chapter 7 bankruptcy this is once your assets have been sold and all of your creditors paid. With Chapter 13 bankruptcy it is completed when the repayment plan of the debtor has been completed, usually over a 3 to 5 year period.
- Credit Counseling: it is mandatory to meet with a government-approved credit counselor before you can commence bankruptcy proceedings. You will also have to complete a course in personal finance management prior to the bankruptcy being successfully discharged.
- Bankruptcy Trustee: A person (or in some cases a corporation) to act on behalf of the creditors. They are appointed by the bankruptcy court. In Chapter 7 Bankruptcy they will review the petition of the debtor, liquidate assets and be responsible for the distribution of those funds to the creditors. In filings for Chapter 13 bankruptcy, the Trustee will also oversee the repayment plan agreed by the court and the debtors’ attorney. They will also receive the monthly payments from the debtor and distribute the monies to the creditors.
Types of Unforgivable Debt
Bankruptcy potentially eliminates a great deal of debt; however, the following debt types cannot be removed in either Chapter 7 or Chapter 13 bankruptcy.
- Reaffirmed Debt
- Debt from student loans
- Government taxes, penalties or fines
- Child Support
- Court penalties or fines
- Federal tax lien owed to the US Government
Loss of property is probably the consequence of bankruptcy most people are familiar with. Both Chapter 7 bankruptcy and Chapter 13 bankruptcy require you to forgo assets and possessions so creditors can be repaid some of the money they are owed. Sometimes, bankruptcy may mean losing possessions, for example, jewelry, vehicles, antique furniture, and real estate. It may also hurt others if you had a co-signer on some of your debt. Bankruptcies take a toll on your credit and will cloud the way future lenders see you. They may decide not to offer you credit or burden you with higher interest rates if they do grant credit. A bankruptcy on a credit report undoubtedly causes harm to your credit score.
Obtaining A Loan Or Credit Card Following Bankruptcy
Once a bankruptcy is discharged, it will probably be very tough to get a loan or a credit card until the bankruptcy comes off your credit report. To start rebuilding your credit potential, you will need to make sure you succeed by paying all your bills regularly and on time. This may make lenders look more favorably; however, expect high rates of interest and terms that are less than favorable should you get approved.
Obtaining A Mortgage Following Bankruptcy
Many of the same problems with obtaining a credit card or loan will apply to a mortgage – plus you can expect to pay a far more significant down payment and interest rates. A good tactic is to reaffirm your home mortgage during bankruptcy proceedings. This will allow you to stay in your home and continue the payments on the mortgage you already have.
Alternatives To Bankruptcy
- Use a debt consolidation loan: These loan types take higher interest loans and combine them into a single loan at a lower interest rate to help you manage your debt.
- Credit Counseling: Credit counseling from a credit counselor who is government approved can help you with a feasible plan to repay what is owed to your creditors. They can also help with budgeting.
- Approaching Creditors to Negotiate a Short Pay: See if your creditors are willing to negotiate a different payment plan. Creditors do not want to have to handle defaults so they may be willing to work with you so a repayment plan that will be successful can be arranged.
Final Thoughts On Debt Relief
Your credit will take a negative hit every time you do not pay a debt in the manner you originally agreed. Before you declare bankruptcy, you should research all of your options, obtain advice from a counselor who is qualified and has a thorough understanding of credit issues so you can understand the full impact your decisions will have to your financial status. Remember you can always make real headway by:
- Utilizing credit in small amounts and paying the total balances when they are due.
- Keeping an eye on your credit report for its accuracy.
- The creation and keeping to a personalized budget.
- Not taking on additional debt.
Bankruptcy: How It Works, Types & Consequences.” Experian, 11 Jan. 2018, www.experian.com/blogs/ask-experian/credit-education/bankruptcy-how-it-works-types-and-consequences/
Speak With Our Bankruptcy Lawyers In Phoenix & Scottsdale
The Canterbury Law Group should be your first choice for any bankruptcy evaluation. Our experienced professionals will work with you to obtain the best possible outcome in your situation. You can trust us to represent you fully so you can move on with your life. Call today for an initial consultation. We can assist with all types of bankruptcies including Business Bankruptcy, Chapter 7 Bankruptcy, Creditor Representation, Chapter 5 Claims, Chapter 13 Bankruptcy, Business Restructuring, Chapter 11 Bankruptcy, and more.
*This information is not intended to be legal advice. Please contact Canterbury Law Group today to learn more about your personal legal needs.