If you have loads of debt, you’ve probably considered filing for bankruptcy. This article discusses the following three things:
- The pros and cons of declaring bankruptcy
- Five popular myths of filing bankruptcy
- Whether or not bankruptcy is right for you
Bankruptcy is a federal process that relieves individuals from debt so that they can start over financially. It was designed to help debtors get a new financial future without being pressured by existing creditors.
What are the Various Bankruptcy Options for Individuals
Your non-exempt assets are liquidated to pay creditors with a Chapter 7 bankruptcy. This option is suitable for anyone with unsecured debt such as credit cards, medical bills, and other unsecured debt. This is also the best choice if you don’t have a source of income. Be advised that a Chapter 7 bankruptcy remains on your credit report for ten years.
Your debts are reorganized or adjusted via a repayment plan with a Chapter 13 bankruptcy. If you have income but want to keep your home, this is the best choice for you. It allows you to pay down existing debts. Be advised that a Chapter 13 bankruptcy remains on your credit report for seven years.
Pros of Filing Bankruptcy
When you file bankruptcy, creditors can no longer attempt to collect money from you. They must stop calling, sending collection letters, garnishing your wages and filing lawsuits. Also, they can no longer attempt to seize your assets, unless it is due to child support or alimony.
If you win your bankruptcy case, the court usually discharges the debt. This means that you never have to pay debts back.
Cons of Filing Bankruptcy
You’ve probably dreamed of making your creditors go away. But there are disadvantages of declaring bankruptcy. You’ll still have to pay your mortgage, taxes, alimony, student loans, and child support. Also, the court may require that you sell nonexempt properties.
Most importantly, your credit score is negatively impacted when you file for bankruptcy. But then again, it may already be low if you have numerous debts. Also, all credit reporting agencies must show that you’ve filed for bankruptcy.
Even if you never intend to accumulate debt again, the damage has already been done. Bankruptcy not only makes it hard to get future credit or loans, but it also hurts your chances to get an apartment or new job. Companies look at credit reports when hiring new employees or approving housing applications.
For example, they could make you pay higher insurance rates and security deposits. Or you could be denied a good job or rental property because of bankruptcy.
5 Popular Bankruptcy Myths
Bankruptcies do more than decrease your ability to get future credit. But there are numerous myths about filing for bankruptcy that you need to be aware of. The following 5 are the top ones:
- If you say it in public, it’s a valid bankruptcy- You cannot just “say” that you declare bankruptcy. There are things that you have to do to make it valid. For instance, you must pay a fee, complete credit counseling and complete loads of legal documentation.
- You Can’t File for Bankruptcy Multiple Times- Anyone can file for bankruptcy more than one time. You can get a discharge from Chapter 7 every eight years, and get a discharge from Chapter 13 every two years. Also, if you finish Chapter 7, six years must pass before you can receive a Chapter 13 discharge. Also, if receive a Chapter 13 discharge, four years must pass before you can receive a Chapter 7 discharge.
- Filing Bankruptcy Negatively Impacts Your Spouse- If you file bankruptcy, this does not impact your spouse’s credit. However, if the debt is in both names, you should both file for bankruptcy. If only one file, creditors will still come after the spouse that did not file.
- You Can Get Jail Time for Outstanding Debts- Although debt collectors will tell you otherwise, no one can put you in jail because of your outstanding debts. Being in debt isn’t against the law in the United States. Yes, creditors can sue you, put liens on your property or garnish wages, but they cannot put you in jail. If you commit fraud, hide property, don’t pay taxes or avoid a judgment, then you’ve committed a crime that is punishable by jail time.
- Filing for Bankruptcy is Expensive- It costs no more than $300 for each type of bankruptcy. Unfortunately, it does cost money to hire a lawyer, and this can range anywhere from $2,000 to $4,000. The actual amount depends on the law firm and type of bankruptcy needed. Some people try to save money by filing without hiring a lawyer, but this is not recommended. You might end up spending more money or causing more damage in the long run.
When to File for Bankruptcy
Work with your creditors. Don’t automatically resort to filing for bankruptcy before researching your options. You could find a one that is better than declaring bankruptcy.
There are plenty of solutions designed to reduce or eliminate financial problems. Research other options such as credit card consolidation, credit counseling, loan refinancing or loan modification. Each one of these options is advantageous for different types of financial issues. You should only consider bankruptcy for the following reasons:
- You have no income or savings to repay debts
- Your taxes are delinquent
- Your home is near foreclosure
- Your wages are garnished
- Creditors are filing lawsuits
Not everyone has the same financial situation. This is why you can’t assume that a debt solution works the same for everyone. If you feel overwhelmed, do not try to solve your financial issues on your own. Get professional help to research options that can help to alleviate financial problems before they get out of hand.
Special thanks to our friends at the Law Offices of Rodney K. Okano in Las Vegas for this piece: