The ideal time to file for bankruptcy usually comes after you’ve used up all other alternatives for paying your debts but are still unable to do so. If, for instance, you have significant debts that you’re unable to pay back, are falling behind on mortgage installments and risk foreclosure, or are receiving collection calls, it could be time to file for bankruptcy.
Bankruptcy often offers a chance to lower or clear your obligations, safeguard your property, and deter debt collectors. However, it has major financial repercussions, such as long-term adverse effects on your credit rating. This, in turn, could have an impact on your future borrowing ability.
Types of Bankruptcy
Federal courts handle bankruptcy proceedings and Federal legislation distinguishes 6 different types. Individuals most often use Chapter 7 and 13 bankruptcy respectively. Chapter 11 primarily impacts business enterprises.
Chapter 7
The most common type of bankruptcy is Chapter 7, which is also known as a liquidation or straight bankruptcy. A court-appointed trustee can dispose of some of the property and assets and utilize the money to partially reimburse your lenders, after which the financial obligations are declared dischargeable.
Certain limitations may apply to the exclusion of some categories of property from liquidation. These include items like your vehicle, your personal belongings such as clothing and furniture, your tools of trade, your pension, and a share of whatever home equity you could have. When you declare bankruptcy, you ought to indicate the items that you claim to be exempt.
Chapter 13
With Chapter 13, you receive a court-ordered repayment plan that covers all or some of your financial obligations over a 3- to 5-year period. Additionally, some of the obligations could be discharged. Chapter 13 can enable you to retain your house so long as you’re able to stick to the agreed-upon repayment schedule because it doesn't call for the liquidation of your assets.
Chapter 11 Bankruptcy
There are several bankruptcy filing options, like Chapter 11, that are not as common and are more expensive for small business enterprises. This kind of bankruptcy is only available to companies with debts worth 2.5 million dollars or more, as well as companies owned by partnerships or LLCs. Chapter 11 is comparable to Chapter 13, in that it individuals can file either chapter. However, it is often reserved for businesses.
This bankruptcy:
- Involves the appointment of a creditors' committee by an independent bankruptcy trustee.
- Sets out a payment schedule for the business to pay off its debts.
- Reorganizes the business following a plan approved by creditors.
Chapter 11 has recently become less expensive for small firms thanks to the Small Business Reorganization Act of 2019, giving them more wiggle room to bargain with creditors over the bankruptcy terms. However, this is still a significantly less typical occurrence than a Chapter 13 bankruptcy. If you believe that declaring bankruptcy under Chapter 11 is your business's best course of action, you can consider consulting an attorney.
The Process of Filing Bankruptcy
There are several stages involved in declaring bankruptcy. Your bankruptcy case could be dismissed if you fail to meet them. Before declaring bankruptcy, you have to undergo credit counseling programs. The counselor will examine the circumstances of your case, provide guidance on setting up a financial plan and managing your debt, and go over potential options for bankruptcy.
Provide Financial Information
Financial statements that detail your income, obligations, and assets should be submitted along with your bankruptcy petition. Additionally, a means test should be submitted to assess whether your earnings are too low to allow you to be approved for bankruptcy under Chapter 7.
It will be necessary for you to apply for bankruptcy under Chapter 13 if you fail to meet the requirements for Chapter 7. Filing fees are additionally required, though they can be wiped out if you can show that you cannot afford them.
The bankruptcy court can provide you with the necessary forms. If you hire a bankruptcy attorney, which is always an ideal choice, they can also offer you the necessary bankruptcy forms.
Get in Touch With the Bankruptcy Trustee
After you file for bankruptcy, the court-appointed trustee will schedule a meeting of lenders (i.e. creditors), often called a " 341 meeting," as the provision of bankruptcy law mandates it. This gives those to whom you owe money an opportunity to inquire about the debtor’s financial condition and, if applicable, how you plan to pay them back.
A bankruptcy court will issue a verdict on the matter after considering the information that you have provided. If the bankruptcy court finds that you tried to conceal your assets or perpetrated other kinds of crimes, you could not only lose the lawsuit but also risk facing criminal charges.
Debtor Education Program
Before any debts get dismissed after you’ve declared bankruptcy, you should complete a debtor education program that offers financial management and budgeting guidance. Once more, you'll need a certificate verifying your participation. The Justice Department or the bankruptcy court can provide you with a list of accredited debtor educational institutions.
If you file for Chapter 7 bankruptcy and the court rules in your favor, all of your dischargeable obligations will be erased. A repayment schedule will be accepted under Chapter 13 bankruptcy. When an obligation is discharged, the lender is no longer allowed to try to reclaim it from the debtor.
Consequences of Filing Bankruptcy
Declaring bankruptcy can severely damage a person's credit rating. While a Chapter 13 filing usually lasts seven years on your credit report, bankruptcy under Chapter 7 will usually remain on the credit report for ten years.
Additionally, there are restrictions on how frequently you can discharge your financial obligations through bankruptcy filings. For instance, you have to wait 8 years before filing for chapter 7 bankruptcy once your obligations have been wiped out in a prior chapter 7 filing.
Is a Bankruptcy Lawyer Necessary?
It is possible to declare bankruptcy "pro se," or without the assistance of an attorney. But since the process of declaring bankruptcy is intricate and needs to be done well to be successful, it is usually not advisable to go through the process without the assistance of a lawyer with expertise in bankruptcy law.
Options Aside From Bankruptcy
Other options rather than bankruptcy often assist you in paying back your debts while having fewer adverse effects on your credit rating. Negotiating with creditors without resorting to the bankruptcy courts can often help both parties. A creditor could approve a repayment plan that lowers the debt or extends the time between payments rather than taking the chance of getting nothing.
If you find yourself struggling to keep up with the mortgage payments, it could be worthwhile to contact the servicer of your loan to discuss possible alternatives to bankruptcy. These can include the following:
- Forbearance—a repayment strategy that spreads out smaller installments each month over an extended period, or the ability to discontinue making installments for a predetermined amount of time.
- Loan modification—alters the terms and conditions of the loan permanently to make it easy to pay back, such as reducing the interest rates.
If you have tax debt to the Internal Revenue Service, you could be able to submit a request for a plea to compromise and negotiate a settlement for less than the full amount of your debt. The IRS occasionally provides monthly payment arrangements for individuals who are unable to make all of their tax payments at once. Be wary of unsolicited proposals from businesses that claim to save your house from going into foreclosure.
Timing Your Bankruptcy Petition
The purpose of bankruptcy laws is to aid those who have accrued excessive debt, frequently due to costly medical fees or other unanticipated expenses. However, it's a difficult process with unfavorable long-term financial repercussions.
Examine all your options before declaring bankruptcy and be ready for any adverse effects. If you consider filing for bankruptcy as the only viable alternative, keep in mind that while the negative effects will last for several years, they are not always permanent.
How Does Filing For Bankruptcy Affect Your Liabilities And Assets?
Your liabilities and assets will be impacted in various ways, based on the way you decide to file for bankruptcy. Most of the personal belongings are subject to liquidation under Chapter 7 to use the proceeds to repay your lenders. When filing for Chapter 13, you get to keep your possessions as you put together a plan to pay off your obligations.
Read on to see how bankruptcy impacts the following:
Small Business Owners
Bankruptcy can allow owners of small businesses that carry considerable amounts of personal debt to keep running their businesses. Remember that unless you are considered a sole proprietor and you're liable for your company's debts, filing for Chapter 7 or 13 bankruptcy would not discharge those debts.
- In Chapter 7, personal and business debts could be discharged in one bankruptcy proceeding for sole owners. If your debt surpasses your business's financial obligations, you are not required to meet the income criteria.
- Chapter 13 simply allows you to eliminate your responsibility for business obligations; your company assets are not liquidated. The company is still liable for the debts it owes.
The Chapter 7 insolvency code allows for the exemption of certain business assets. For example, you could be able to continue operating the company after paying off its financial obligations through insolvency if it is service-oriented and doesn't keep equipment or large inventories.
Student Loan Holders
Bankruptcy in general will not discharge your student loan obligations. However, through what is known as an Adversary Proceeding, it is possible to get the student loans discharged.
If you require assistance with paying your student loan obligations, you should contact your creditor for assistance with repayment plans or consider consolidation of debt.
Mortgage Holders
Your mortgage and house will be listed as assets in the bankruptcy filing so that your capacity to pay can be assessed. Your mortgage could be affected in various ways based on the kind of bankruptcy declaration you choose:
- Chapter 7: You are able to keep the home if you can afford to stay current on the mortgage payments, assuming you have exempted any equity in the property.
- Chapter 13: Your residence isn't liquidated, and you are still responsible for repaying your loan according to the terms outlined in your bankruptcy repayment plan.
If you opt to reaffirm the mortgage in Chapter 7, you could end up trapped with the loan's liability when the bankruptcy is completed. If you can't make the payments, creditors could be able to take legal action against you to recoup the debt and you won't be allowed to file for Chapter 7 again for a while.
Is All Debt Forgiven in Bankruptcy?
Although bankruptcy can erase many different kinds of debt, not all debts are eligible to be discharged. For instance, unless you fulfill specific additional requirements, such as demonstrating that settling your financial obligations would put you in an unjustifiable hardship, student loans normally don't qualify for bankruptcy.
Does Declaring Bankruptcy Clear Credit Card Debt?
Credit card debts are usually discharged in bankruptcy. However, consult with your creditors before declaring bankruptcy if you have a credit card debt. They could be open to working out a different payment plan with you to prevent the obligation from being written off entirely.
What are Debt Management Plans?
These are strategies developed by debtors, creditors, and credit counselors to assist the debtor to repay their debts with greater success. In most debt management schedules, you have to make regular monthly installments, and you are barred from getting new credit while paying off your existing debts.
Find a Sacramento Bankruptcy Lawyer Near Me
Knowing the right moment to declare bankruptcy is critical for minimizing financial implications. Although declaring bankruptcy can seriously damage your credit rating, it could be the ideal way to manage debts that you’re unable to pay.
Before you file for bankruptcy, think about speaking with our reputable bankruptcy lawyer at Sacramento Bankruptcy Lawyer, who can go through all of your alternatives for repayment. You can start rebuilding your credit score and gradually place bankruptcy filing behind you by managing the credit wisely going forward and paying your expenses on time. Contact us today at 916-800-7690.
