Have your bills piled up in 2020 due to the adverse financial circumstances created by COVID-19? Are you planning to file bankruptcy to get rid of your debts? Well, bankruptcy may seem to be an easy solution for your existing financial problems. However, you have to remember that bankruptcy is a complicated legal process. It has many rules and regulations. There are many important facts you have to consider before filing bankruptcy. So, to help you understand bankruptcy better, I have compiled six facts you need to know before filing for bankruptcy.
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Six facts you must know before filing bankruptcy
Bankruptcy helps to postpone foreclosure. It also helps to stop automatic stay. But that is not everything to kow about bankruptcy. Here are the six essential facts you must know before filing bankruptcy.
Fact 1 – When it comes to personal bankruptcy, you can either file Chapter 7 or 13 bankruptcy
If you want to file bankruptcy in your personal capacity, you have two options. The first option is filing Chapter 7 bankruptcy. And the second option is to file for Chapter 13 bankruptcy.
Chapter 7 bankruptcy is straight bankruptcy. It is also known as liquidation bankruptcy. Many people prefer to file for Chapter 7 bankruptcy as the process is simple and quick. You can discharge your bankruptcy within 3 to 4 months. You can discharge your medical debts, credit card debts, utility bills, etc. with a Chapter 7 bankruptcy plan.
The bankruptcy court will sell your non-exempt assets and disburse the amount among your creditors with the sale proceeds.
The second option is filing Chapter 13 bankruptcy, which is also known as a reorganization bankruptcy. In this type of bankruptcy, you have to pay off the entire debt through a reorganization plan over time. You will get a maximum of five years to clear your financial obligations.
You have to propose a repayment plan to the court. You have to specify the measures you will take to pay off debts during this period. If the court approves your plan, you can kick start Chapter 13 bankruptcy from the specified date. Otherwise, the court will prepare a repayment plan for you.
Chapter 13 is a viable option for many as it helps it retain properties and clear debts at the same time.
Fact 2 – You have to pass the Means Test
You have to go through a Means Test. That is mandatory.
The Means Test determines if you will file Chapter 7 bankruptcy or Chapter 13 bankruptcy based on your state median income. If the result of the test shows that you are a high-wage earner, then you must file Chapter 13 bankruptcy.
Most people tend to file Chapter 7 bankruptcy as it helps to get out of debt within 3 to 4 months. A Chapter 13 bankruptcy lasts for 3 to 5 years and that is a long time. The reorganization plan is not easy to stick to for some peple. They have to lead a frugal life and make payments as per the plan. Plus, they cannot even create an emergency fund during the repayment period.
The Means Test compels high-wage earners to pay back their creditors as per their affordability within 3 to 5 years instead of brushing off all their liabilities.
Fact 3 – Bankruptcy affects your credit score
Bankruptcy can affect your credit score both in a good and bad ways. When you discharge debts through bankruptcy, your outstanding balance on credit cards becomes zero. So, your credit utilization ratio becomes zero. It is the ideal ratio. So, when you have the ideal credit-utilization ratio, your credit score is likely to increase by several points. The credit utilization ratio constitutes 30% of your FICO score. So, you can do some simple math and get an idea about how much your score may increase after discharging your debts.
There is one negative side to filing bankruptcy. Chapter 7 bankruptcy stays on your credit report for ten years. On the other hand, Chapter 13 bankruptcy remains on your credit report for seven years. Plus, it may drop your credit score by 200 points in some instances. Some potential lenders may not like the fact that you have filed bankruptcy. However, some credit card companies may agree to give you credit cards immediately after receiving a discharge. Since all your credit cards are paid off, some creditors assume that you can make the monthly payments. Moreover, to minimize risks, creditors will charge high-interest rates on your credit cards, which is a risk for those who cannot control their spending.
Fact 4 – Bankruptcy is an expensive and complicated process
Bankruptcy is an expensive process. You have to pay $335 for filing bankruptcy. Again, if you file for Chapter 13 bankruptcy, you have to pay a filing fee of $310. Apart from the filing fee, you have to pay a fee to the court-appointed trustee. The fee usually varies from $15 to $20. Apart from the bankruptcy filing fee, you also have to pay the attorney fee. An attorney may charge anywhere between $1000 and $3500 for a Chapter 7 bankruptcy case. If you are filing a Chapter 13 bankruptcy, you may have to pay between $2500 and $3500 as attorney fees. The average attorney fee is $3000.
Fact 5 – You have to be honest when it comes to filing bankruptcy
You have to maintain absolute honesty when it comes to filing bankruptcy. When you are filling out bankruptcy forms, you have to give the correct facts and figures on them. You have to mention all your assets, debts, and creditors. You cannot hide anything from the bankruptcy court.
If the bankruptcy court finds that you have not maintained complete honesty in your bankruptcy forms, then you are in trouble. The court may dismiss your bankruptcy case. Bankruptcy fraud is a criminal offense. You may face severe legal consequences for it.
Fact 6 – If you receive a windfall, you cannot keep it for personal use
The bankruptcy court is quite stringent. If you receive any windfall, you have to use it to pay off debts. You have to inform the bankruptcy court immediately. The court will use the money to clear your debts. You cannot hide it. And if you hide the fact and the court comes to know about it, your case may get dismissed. It will be considered bankruptcy fraud.
Final words on six facts you must know before filing bankruptcy
There is one more fact you should be aware of. You cannot skip the specified monthly payments in Chapter 13 bankruptcy. Payment defaults can lead to adverse consequences. Your creditors can request the court to foreclose your property. However, if you face financial hardship due to certain reasons, you can consult your bankruptcy attorney. The attorney will submit a petition in the court and request to modify your repayment plan. He will ask the court to reduce the amount you pay every month as part of the repayment plan.
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Stacy B. Miller is a writer, blogger, and a content marketing enthusiast. Her blog vents out her opinions on debt, money and financial issues. Her articles have been published in various top-notch websites and she plans to write many more for her readers. You can connect with her on Facebook and Twitter.