10 Things to Keep in Mind When Filing Bankruptcy
Posted By Macey Farnsworth on November 1st, 2018
Filing for bankruptcy can be stressful and trying, but it can also give people with substantial debt a way out of the cycle. Here are ten things to keep in mind when filing for bankruptcy.
Two Types Exist
Filing for bankruptcy isn’t a one-size-fits-all process. In fact, there are even two types of bankruptcy individuals can file. One is Chapter 7, which involves wiping out your debt in exchange for liquidation of some of your property. You can keep those items which are exempt, but exemptions depend on what state where you live.
Chapter 13, however, is for higher-income earners and doesn’t require property liquidation. You do, however, have to pay creditors the value of the nonexempt assets. Which type you file depends on your income, the amount you owe and other factors.
Eligibility Requirements Vary
For either type of bankruptcy filing, you need to fulfill specific criteria. For example, with a Chapter 7 bankruptcy, you only qualify if your disposable income is less than what a Chapter 13 payment plan would be.
There are also limits to the amount of both secured and unsecured debt that you can have when it comes to Chapter 13 bankruptcy.
Protection Isn’t Automatic
In most cases, the moment you file a bankruptcy case, any creditor action stops. This is called a stay. However, there are times when the stay doesn’t go into effect automatically, such as when you file two cases in one year. In this case, the “pause” lasts for thirty days unless you ask for an extension.
If you’ve filed two cases already, the stay will not go into effect when you file a third case. You must see a judge during a hearing to explain yourself before it can be granted—and they may not grant one at all.
Also, a stay doesn’t last forever, and the court can lift it if they determine there’s a good reason to. Therefore, the decision to file bankruptcy shouldn’t be taken lightly, as it may not offer the protection you’re hoping for against creditor movement.
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It Affects Your Credit
A high amount of debt might be negatively impacting your credit score already. But bankruptcy can remain on your credit report for ten years, which can also adversely affect your score. Other factors such as the age of your accounts and lending history, plus things like credit card usage percentages, can further complicate things.
In the end, you might see your credit score sink lower before anything begins to improve. You also cannot file again for six years after completing a bankruptcy case.
Different Types Last Different Lengths
Although Chapter 13 bankruptcy lasts seven years on your credit report, Chapter 7 stays for ten years. This is because Chapter 13 requires repayment of debt, at least partially. With Chapter 7, none of the debt is repaid.
You should know, however, that while the bankruptcy will automatically drop off your credit report, you won’t receive notification when it does. Therefore, the best way to check your credit is by requesting a credit report from a reputable organization. Often, banks, credit card companies and credit unions offer their members a free credit report.
Bankruptcy Doesn’t Erase All Debt
While bankruptcy erases debt, it doesn’t remove all debt from your record. These types of debts are called non-dischargeable debt and include:
- Child and spousal support
- Income taxes owed within the last three years, sometimes more
- Injury or wrongful death payments owed due to DUI
- Student loan debt (except in select cases)
Not All Debt Is Equal
While bankruptcy deals with most types of debts, there are different classifications. One is unsecured debt, which has no connection to the physical property. In this case, a creditor can’t take back whatever it is you stopped paying on.
Secured debt, however, means the creditor has the legal rights to the property if you stop making payments. For example, a home mortgage is a secured debt. In the event that you stop paying, the bank can foreclose on the home and take your house in exchange for the cost of the debt.
Special Bankruptcy Forms May Apply
In addition to Chapter 7 and 13, other types of bankruptcy filings exist but are less common. For example, Chapter 11 is complex and usually filed by businesses, although individuals can file it too. Chapter 11 typically involves working out a reorganization plan to repay debt, while keeping ownership of all property.
Chapter 12 is another type of bankruptcy specifically for farm owners. This uses a repayment plan with creditors and allows the farm owner to maintain rights over his assets. It can be helpful to understand what types of bankruptcy there are so you can file the type that best fits your situation.
You Can Cram Down Debt
In Chapter 13 bankruptcy, there is a cram down clause that allows you to reduce the amount of debt you have by matching the value of the property to it. For example, if you’re making payments on a car but it’s worth less than the loan value, you may be able to negotiate a lower price tag on the vehicle. Then, you’ll only repay what you and the creditor agree the vehicle is worth.
However, you cannot cram down car debt if you bought it within 30 months prior to filing bankruptcy. You also can’t cram down a mortgage, so consider this before filing bankruptcy based on this feature alone.
It Won’t Help Student Loans
As mentioned, filing for bankruptcy likely won’t help you get out from under student loans. However, you can discharge student loans in bankruptcy if you can prove that paying the loan back will cause you undue hardship. You must also prove that you can’t afford to pay the loans and that there’s a very slim chance that you’ll ever be able to.
Therefore, in most cases, student loan debt is something you’ll just have to learn to live with, though many other types of debt can disappear thanks to a bankruptcy filing.