Filing for bankruptcy may be a logical step for you. However, you should understand some key concepts about what to expect when you file for bankruptcy.
Individuals use two common types of bankruptcy to manage their debt: Chapter 7 and Chapter 13. Understanding their differences can help you decide which is best for you.
Chapter 7 bankruptcy is often called “liquidation bankruptcy.” It involves selling assets to repay creditors. Ultimately, a bankruptcy discharge can eliminate most or all of your debt.
You must qualify for Chapter 7 bankruptcy through a “means test,” which evaluates your income and assets and determines if you are eligible to file.
You can often keep certain exempt assets, such as a car, furniture, and personal belongings, up to a specified value. However, nonexempt assets, including cash, real estate, and investments, are turned over to a court-appointed bankruptcy trustee who will liquidate them and pay off as much debt as possible.
A Chapter 7 bankruptcy will remain on your credit report with the three main credit bureaus (Equifax, TransUnion, and Experian) for up to 10 years.
Chapter 13 is also called “reorganization bankruptcy.” It involves developing a court-approved three- to five-year plan to repay your creditors. You must have enough income to cover your current expenses and your repayment plan to qualify for Chapter 13. If you fail to make timely monthly payments on your Chapter 13 repayment plan, your bankruptcy may be converted to a Chapter 7, and you may lose your assets in a liquidation sale.
Some debt may be discharged in Chapter 13 as well. After you complete your Chapter 13 repayment plan, anything remaining may be discharged debt.
A Chapter 13 bankruptcy will remain on your credit report and affect your credit score for up to seven years.
Although bankruptcy will impact your life, it won’t ruin it. In many cases, bankruptcy will allow you to get out from under oppressive debt, stop wage garnishments and evictions, and get back on track in your financial life.
Some common myths about life after bankruptcy include the following:
If you have questions about any of these myths, you should reach out to a bankruptcy case attorney who can help you understand how bankruptcy would affect you individually. Every case is different and recovering from bankruptcy is possible.
It is possible to regain control of your financial life after filing for bankruptcy. Here are some of the best steps you can take to help you recover from bankruptcy:
You will be required to attend two credit counseling courses during your bankruptcy. However, they will just address the basics of life after bankruptcy. You should consider a more in-depth credit counseling course or individual credit counselor who can address your specific needs.
After bankruptcy, you should open a savings account and begin putting away money for an emergency fund or other occasional needs. Do not use money from your savings account for basic needs or frivolous activities and items. You should only use money in your savings account in an emergency, like if you lose your job or need to fix your car unexpectedly.
While moving up in the career world is important, maintaining a steady job is essential after bankruptcy. Don’t jump from job to job, even if you think you can build a higher income. Not only will this look less stable to creditors, but you may also end up without a job and face financial hardships again.
Creditors also look at residential history to determine if a person is stable. If you lost your home in bankruptcy, you should rent a home or apartment on a consistent basis. If you are unable to rent, you may have to live with a friend or relative until your credit improves. Try not to bounce around from different living situations, which can make creditors question your financial stability.
It’s essential that you pay all current expenses on time, including credit cards, utility bills, rent, mortgage, car payments, and more. Don’t miss a payment or allow any accounts to become past due more than 30 days. Your creditors will begin reporting your past due status on your credit report and you will be in a negative financial spiral again.
You should open and maintain a checking and/or savings account after you file for bankruptcy. If you have a history of charged-off bank accounts, that could hinder your ability to open a new account. However, many banks offer second-chance programs to people who have filed for bankruptcy. Always keep a positive balance to show creditors that you have a reliable cash flow.
Soon after your bankruptcy is complete, you will begin receiving offers for new credit accounts. These accounts will be targeted at people who have filed for bankruptcy and may not be the best option for you. Scrutinize the terms of all new accounts.
You can, however, open a secured credit card account to begin rebuilding credit. This involves depositing money with a creditor and repaying what you use monthly.
There are many debt relief and credit repair scams that will promise to negotiate with your creditors or otherwise reduce your repayment obligations. They may even claim they can get your bankruptcy removed from your credit report early.
These companies rarely operate in good standing within a state, and they typically charge high fees.
If you need to modify your Chapter 13 repayment plan or need someone to negotiate with creditors, you should work with a trusted bankruptcy attorney.
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