Bankruptcy is a court proceeding that allows you to discharge some or all of your debt and make a fresh start.
There are three types of bankruptcies you can file for if you are in need. In all cases, you will need to gather your financial records, speak to a bankruptcy counsellor and then file a petition.
Depending on the type of filing, you may save some or all of your assets as well. However, there are certain drawbacks of filing this petition that you must consider before making the final call.
In this article, we’ll guide you through the bankruptcy process and how you can file it with an overview of the pros and cons of this decision.
What is Bankruptcy?
Bankruptcy is a legal process where the court judges whether an individual or a company can manage or repay the debt or not.
Its aim is to help individuals and businesses restart financially when they cannot afford to repay their debts.
The court decides whether the lenders should be repaid and how they get repaid depending on the type of bankruptcy case.
Bankruptcy cases in the US are heard in federal courts by bankruptcy judges and counsels. You’ll need to hire a lawyer or a counselor to proceed with the case, however, you can seek government assistance for a free filing as well.
When you file for bankruptcy, the court will decide whether you can repay your debts. You can get help if the court forgives some of your debts and/or provides a repayment plan for you to follow.
How to Qualify for Bankruptcy?
Individuals and businesses struggling to repay their debts can apply for bankruptcy. There is no minimum debt condition to apply.
In most cases, individuals apply for bankruptcy as the last resort seeking a court bailout. These are the debtors who cannot repay any existing bills, installment loans or invoices due to low income or other financial challenges.
In other situations, some individuals or businesses may apply for bankruptcy as a financial planning tool. They may foresee a difficult time and head to court seeking help.
Either way, the decision to file the bankruptcy is crucial for your financial health. It affects your credit history and it removes your credit score altogether.
Therefore, you should always consult a lawyer or a counselor to assist you in making the right call at the right time.
Types of Bankruptcy
Part of deciding whether and how to apply depends on which type of bankruptcy you should file for.
Chapter 7
With Chapter 7 bankruptcy, the court orders to liquidate the assets you own such as cars, jewelry, household items, and other items that can be sold in the market.
The court will order you to sell your non-exempt property and you can keep the exempt property items. The exemption laws vary by state or you can choose to follow the federal law.
In this type of bankruptcy, all or most of your debt will be discharged by the court which means you no longer have to repay.
You’ll need to pass the “means test” where the court assesses your income and expenses. It is also a process to evaluate your average income against the average income of your state.
If you pass the means test, you’ll be allowed a debt discharge through the court proceedings. You can reapply for a means test at any time though.
Chapter 11
Chapter 11 is a type of bankruptcy that allows businesses to continue operations while being discharged from debt obligations.
Businesses of any size can use this chapter to get a fresh start in financial terms.
Chapter 13
In Chapter 13 bankruptcy, debtors can keep their property and get a 3-5 years plan to repay their debts.
You must meet the criteria of owing certain amounts of secured and unsecured debts and these debts should not exceed the maximum limits by law.
If the court approves your application under this chapter, some of your debt will be forgiven and the remaining will be repaid with the repayment plan.
There are three different types of bankruptcies you can file for: Chapter 11 is for business, and Chapter 7 and Chapter 13 are for individuals.
How to File for Bankruptcy?
You can follow these steps to file for bankruptcy once you have decided which type is the best option for you.
STEP 01:
The first step is to gather your financial records including your assets, liabilities, income, and expenses.
These records can help you assess your financial situation and will also help your counselor.
STEP 02:
You’ll need to get a certificate for bankruptcy counseling from a US court-approved counselor to file the case in court.
You can complete this session online or on phone and your approved counselor must provide you with a certificate.
STEP 03:
You can file the petition by yourself or through an attorney representing you in court.
Your best chance is to hire a lawyer and consult which type of bankruptcy is the best choice under your financial circumstances.
STEP 04:
Your case will get a bankruptcy trustee and you’ll need to attend a 341 meeting with your creditors.
Your creditors will ask questions about your financial position and they must satisfactorily reply to the court to further proceed with the case.
STEP 05:
The court will then decide on your application and if approved, some or all of your debt will be discharged depending on the type of application you filed.
You’ll also need to go through a financial education course at the end of the court hearing.
Filing for bankruptcy should be your last resort. Consider all your options, the benefits and drawbacks before you make your decision.
How Can Bankruptcy Benefit You?
The biggest advantage of filing for bankruptcy is immediate protection. You’ll no longer receive calls from your creditors and lenders.
A key benefit of filing is to get a long-term debt repayment plan. The court will decide whether your belongings will be sold or not and you’ll get a financial plan.
Your unsecured loan will be wiped out fully or partially depending on your financial health. Either way, it will be a big relief for you.
In most cases, you’ll also be able to save your belongings if you can repay part of your debt in the settlement arrangement.
If you apply for chapter 13, you’ll get a debt repayment plan for three to five years. It means you can get a new financial plan to repay your debts.
In short, bankruptcy is a good choice for borrowers who have been struggling to repay their loans and don’t see financial relief otherwise.
What are the Pitfalls of Bankruptcy?
There are certain downsides to filing for bankruptcy.
The first and most important is that your credit score will be erased. It means you’ll need to rebuild your credit score from zero and that will be more difficult this time.
The second drawback is the difficulty in getting new credit in the absence of a credit score and having a bankruptcy mark on your credit report.
The third drawback is that you could lose all or some of the non-exempt assets that you own. These items may be your favorite sports gadgets, household items you have no necessary need for or other precious items.
These points also mean that you may have to rely on unsecured debt in the future again. It can increase the cost of borrowing and you may end up in the debt trap again.
Should You File for Bankruptcy?
If you have never filed for bankruptcy before and can pass the means test, you can benefit from the decision.
However, you must use this option as the last resort and try to get financial compensation using other methods. Try borrowing from family and friends, earning extra money with a second job or some side gigs, or selling some items you don’t need to clear the debt before you turn to file for bankruptcy.
The consequences of filing for bankruptcy are long-lasting and you may not find the financial freedom in the long run that you are looking for through bankruptcy filing.
