You did everything you could – you cut down your expenses, you sold some possessions so that you can pay bills, you even tried to earn extra income to cover your ever-increasing debt and still you didn’t manage to keep your head above the water.
You came to a painful conclusion that you might need to file for bankruptcy. While it might be a solution, it’s not the only one on how to get out of debt. Before you file for bankruptcy, you might want to see if you could get financial counselling where you will get help on how to get out of debt and will have a tangible plan on how to do it.
If you still come to the decision of having to file for bankruptcy, we know people do not come to this decision lightly. Not only does bankruptcy take a huge emotional toll on a person, it also means that it stays on their credit reports for 7 to 10 years (depending on the type of bankruptcy they file for). This has an implication that people filing for bankruptcy might be unable to get a credit for the next 10 years in more or less any form (including home loans, credit cards, car loans, etc.) as well as few others.
Let’s have a look at what exactly bankruptcy means. Bankruptcy is a court proceeding where you tell the judge you can’t repay your debts. The judge and the court trustee then examine your assets and liabilities and decide whether your debts should be written off. If the court finds that you really cannot pay those debts, you declare bankruptcy.
Depending on the type of bankruptcy you file, it can stop foreclosure on your home, repossession of property or business, or garnishment of your wages. Even though bankruptcy is meant to help you get out of debt, there are debts that it does not clear:
- Governmental debts, taxes or penalties
- Student loans
- Child support or alimony
- Expensive items purchased in the six months prior to filing bankruptcy
Main types of bankruptcy:
There are two main types of bankruptcy for consumers: Chapter 13 and Chapter 7
- Chapter 7
Chapter 7 bankruptcy means that the court sells all your assets (potentially with some exceptions), so that you can pay back as much debt as possible. Once that is done, the remaining debt is erased. With this type of bankruptcy, you could lose your home or a car in the process depending on what the court decides in your case. You can file for Chapter 7 bankruptcy if the court decides you really do not have sufficient funds to repay all your debt. This type of bankruptcy stays on your credit report for 10 years.
- Chapter 13
Chapter 13 bankruptcy means that the court approves a plan for you to repay some or all your debts over a period of time, usually between 3 and 5 years. You get to keep your assets and you are given time to bring your credits, like mortgage, up-to-date. With this type of bankruptcy, you agree to monthly payments and must follow strict budget that will be monitored by the court. This type of bankruptcy stays on your record for 7 years.
There are also other types of bankruptcy like Chapter 11 and Chapter 12, but they are meant for businesses and farmers and fishermen respectively.
Consequences of filing for bankruptcy
First and foremost, bankruptcy takes a huge emotional toll on a person. It could probably be compared to divorce, loss of a loved one or a business failure. However, emotional toll is not the only consequence of bankruptcy.
- Your bankruptcy becomes public. This means that your name and other personal information will appear in court records that can be accessed by the public. So, your potential employers, banks, landlords, clients, etc. can access the details of your bankruptcy.
- Filing for bankruptcy is expensive. Filing for Chapter 7 bankruptcy will cost around $335 for handling fees and between $850 and $3500 for an attorney. Chapter 13 bankruptcy will cost you $310 for handling fees and between $1500 to $6000 for an attorney.
- Getting any substantial amount of credit. It might take one to four years to qualify for a mortgage after you file for bankruptcy and creditors are not too keen on giving you other types of credit either.
Steps to take before you file for bankruptcy.
Filing for bankruptcy requires a lot of preparation. Below are some key points you need to know before filing for bankruptcy.
- Check other options first. Before you file, check other options to pay off your debts. Try to negotiate payment delays or better rates with your creditors. Move to a smaller place. Get an extra job to pay bills. Live on a stricter budget. Try your best to get out of debt in a different way before you file.
- Get a financial coach to help you. A financial coach can give you a different unbiased perspective on your debt. They will make a budget plan with you to help you get out of debt without filing for bankruptcy. They will also provide encouragement and a kick into the right direction that many need to start getting out of debt without feeling overwhelmed.
- Prepare your paperwork. Make a list of all your debts, from student loans to mortgage to alimony, etc and make sure you have documents that confirm the amounts. Whoever you talk to about your debts – financial counselor, bankruptcy attorney – they will need to see these documents.
- Get a professional to help you with paperwork. If you have done all of the above and still do not manage to get out of the red, filing for bankruptcy might be your only option. The procedure is quite complex leaving a lot of potential for mistakes, so hiring a professional to help you file might be a smart idea.