Bankruptcy has many benefits because it eliminates most of your current debt, stops all debt collection activities from creditors, and gives you a fresh start. Unfortunately, this legal process of debt relief is not for everyone. You must consider many factors before filing for bankruptcy because people’s financial situations differ. You might find that your financial situation needs a few lifestyle changes, and you can manage the debt. For others, bankruptcy might be the only way out of financial constraints. However, the main question is, how do you know that bankruptcy is the right option for your situation

Explore the Various Forms of Bankruptcy

The first place to begin finding your answers on whether bankruptcy is the most suitable option for your financial situation is understanding the various types of bankruptcy in California. The two common forms are; Chapter 7 and Chapter 13.

Chapter 7

Chapter 7 bankruptcy, also commonly referred to as liquidation bankruptcy, is a legal proceeding that wipes or eliminates most of your debt, giving you a clean slate. Usually, a judge reviews your files and decides to grant or deny your petition.

Upon approval, the court places you under an automatic temporary stay whose purpose is to deter debt collection agencies from collecting any payment or engaging in debt collection action like garnishment, foreclosure or repossession, until the automatic stay duration is over. This Chapter offers immediate relief to people unable to pay a debt, and their wages are not adequate to continue paying it. However, despite these benefits, it has its shortcomings.

By declaring bankruptcy under this Chapter, your credit score is negatively affected for many years. Additionally, you lose your non-exempt assets because the trustee assigned your case repossesses and puts them up for sale to raise many to repay your creditors.

Chapter 13

Chapter 13 or reorganization bankruptcy is for individuals with regular disposable income but cannot manage the income to repay debt. Instead of selling property, these individuals develop a repayment plan based on their current income and present it before the court. Upon approval, the individual makes these payments for between three to five years, after which the court discharges the remaining debt.

If the payment plan is approved, you are put under automatic stay, same as in Chapter 7, where collection actions from creditors are paused until the period of stay ends. The benefit of this chapter is that creditors can’t start or continue lawsuits, no wage garnishments, and creditors are forbidden from harassing using phone calls.

Remember, bankruptcy takes time, so you must be patient and dedicated. Additionally, either chapter negatively impacts your lifestyle, loan interest rates, and credit score, but it’s an excellent way to obtain financial relief. 

Therefore, if you are looking for a fresh start financially, you should talk to a bankruptcy attorney to help you evaluate your situation carefully and advise you on the best chapter to seek an automatic stay.

If you need more time to wipe out your debts, chapter 13 is the right choice because it stops debt collection action from creditors and provides you with a reasonable repayment plan. When looking to dismiss credit card debt and medical expenses, Chapter 7 is the best option because it discharges all unsecured debt at the end of the stay, providing you with a fresh start.

Consider Bankruptcy Alternatives

Suppose the main challenge you are facing with your debt is creditor harassment. In that case, bankruptcy won’t end your problems because even after you have completed the procedure, you will still have some creditors on your back demanding payment. Several means of preventing creditor harassment are available. You must explore them first to do it, knowing what other options were available if you still want to continue with bankruptcy. Some of the bankruptcy alternatives available include:

  1. Loan Modification

If all the initial loan agreement factors remain constant, you should complete paying your loan within the agreed period because principal payments are made regularly. Suppose you can’t keep up with the regular payments. In that case, you have to ask for loan consolidation or modification where the initial terms of the loan are modified to enable repayment. The changes include the reduction of installments or penalties.

  1. Debt Consolidation  

In the recent past, many people having problems with debt management have been opting for bankruptcy to wipe their high debts. Debt consolidation loans have resolved this problem because you take out this loan and pay all your creditors, and you are only left with one creditor to deal with. These loans are easy to access because some lenders won’t even require collateral to issue them.

Remember, creditors have varying business rules, so you need to reach out to them and listen to what they have to say about their loans. Debt consolidation has its share of challenges because it takes time to save enough money for all your debts, which means creditors might take legal action against you. Therefore, if you know you will eventually settle your debt, consolidation loans are not the way to go.

  1. Credit card Negotiation

If you are looking to dig yourself out of debt, credit card consolidation is another alternative to bankruptcy that you should explore. Before considering this alternative, find a bankruptcy attorney to help you review your annual credit card report. Based on the analysis of your financial situation, you can choose to:

  • Sell your car or home and buy a cheaper one
  • Secure a personal loan
  • Find a side hustle
  • Negotiate with your creditors

 

  1. Short Sale

A short sale is a case where you agree with your lender to sell your property for an amount lower than the outstanding amount of debt, and the sale proceeds go to the creditor. It is a good option instead of declaring bankruptcy which affects your borrowing abilities.

Although it will affect your credit score, it is easier to recover under this alternative than when you have filed for bankruptcy. However, a short sale has eligibility criteria that one must meet, including:

  • Lack of financial capacity to pay the debt
  • The market value of your property after an appraisal is lower than what you owe
  • The people you owe must agree to the short sale
  • There must be a qualified buyer who has made an offer to buy the property

Before considering this option as an alternative to bankruptcy, you will need legal counsel from a bankruptcy attorney.

  1. Deed in Lieu of Foreclosure

Deed in lieu is a deed document where you convey your rights on a property to the creditor intending to satisfy the debt and avoid the shame of a foreclosure. This bankruptcy alternative relieves you of the obligation to repay the loan right away, but it affects your credit rating. It’s easier to recover from the effects of a deed in lieu than from foreclosure damages. 

If you explore these bankruptcy alternatives first, it will be easier to determine if filing for an automatic stay is the right option for your financial situation. By exploring these options first, you will be sure that bankruptcy is the only option to salvage your financial situation. However, going directly to declare bankruptcy without considering these alternatives might not be the best decision because you will be deciding blindly; hence you might not acquire maximum benefits from the legal process.

Ensure you meet the Eligibility Criteria for Bankruptcy

When deciding if bankruptcy is the right debt relief option for your economic situation, you must consider your eligibility. If you don’t meet the minimum criteria under each form of bankruptcy type, then it might not be suitable for you.

Suppose you want to file for liquidation bankruptcy. In that case, you must measure your current income against that of a median-income household in the state. The average minimum earnings are your average income for the last six months before filing for liquidation. If the income is less or equal to the median income of a California household, then liquidation bankruptcy is right for you. If the income is higher than the average income of a median home, you must meet the means test to qualify under this chapter.

You should also consider your disposable income and whether it’s enough to repay some of your unsecured debts at least. Bankruptcy schedules are also considered, and you can only file for automatic stay protection under this chapter if you are unable to use your monthly income leftovers to pay the debt. If your income balance after expenditure is enough to pay creditors, then you should consider chapter 13 bankruptcy.

Also, you cannot qualify for liquidation bankruptcy if you filed for one in the last eight years or if it is proved you attempted to defraud investors.

Under Chapter 13 bankruptcy, you must meet the following criteria to file bankruptcy under it. The requirements under this chapter include:

  • You must provide evidence that you filed your federal and state income taxes for the last financial years.
  • You must have sufficient disposable income from the regular salary, income from self-employment, royalties, wage from seasonal work, and other income sources to meet your debt obligations.
  • If you are a business or have excessively high debt, you cannot file debt relief under this chapter.

Both liquidation and reorganization bankruptcies have qualifications that one must meet. You must understand these qualifications to determine if either of the bankruptcies is right for you. If you fall short of Chapter 7 criteria, then you should consider Chapter 13. However, you should talk to a profound bankruptcy attorney for an informed decision before spending much of your time and resources to file a bankruptcy petition for it to be declined. Many attorneys offer zero-obligation consultation. You cannot explain your options and help you establish the type of bankruptcy you are eligible for.

Learn Which of Your Debts Won’t be Forgiven

To know if bankruptcy is right for you, you need to know what it can or cannot do. You can derive a lot of benefits from automatic stay protection under either of the chapters. One of these benefits is that creditors or debt collectors will be prohibited from debt collection actions like garnishment and lawsuits. Further, the automatic stay protects your property against foreclosure, temporary eviction, or repossession. It clears most of your credit card and other nonpriority unsecured debts.

Both chapters have unique solutions to your debt problems too. For instance, liquidation bankruptcy clears all your debt within a maximum of four months. On the other hand, reorganization bankruptcy will pay part of your unsecured debts within three to four years, and the remaining unsecured debt remainder at the end of the automatic stay period will be discharged.

It’s also critical to understand what bankruptcy cannot do when determining if it’s right for you. Bankruptcy under either of the chapters can eliminate your obligation to pay creditors, but a lien stays on your property. It means that it cannot deter a secured creditor from repossessing or foreclosing property you cannot afford.

Even after you declare bankruptcy, your child support and alimony obligations will survive, and you will continue to owe this debt. Additionally, it can’t wipe out most tax debts and other nondischargeable debts, including:

  • Debts that you forget to list in your bankruptcy paperwork
  • Obligations resulting from the restitution of victims of your drunk or drugged driving
  • Court fines and penalties imposed as punishment for criminal proceedings

Under Chapter 7, these debts are not discharged at the end of the automatic stay, while in chapter 13, you clear all these debts through the repayment plan.

Before picking a debt relief option that suits your financial situation, you must talk to an attorney so that they can manage your expectations. An experienced attorney will educate you on what each of the chapters can and cannot do and which of your debts won’t be forgiven to pick the option that will provide maximum benefits.

What Happens to Your Home After Bankruptcy?

To determine if bankruptcy is the right direction to take, you must consider what will happen to your home. If some of your debts are forgiven, you can manage to repay your mortgage, keeping your house. Unfortunately, by filing for bankruptcy under Chapter 7, they will liquidate most of your property to pay creditors, and this might include your home. It is possible for repossession or foreclosure on your home to happen when seeking a fresh start financially. However, most of those who declare bankruptcy end up retaining their homes.

Under chapter 13, you can keep all your property, including your home, because if you have mortgaged your house, the mortgage payments will be included in the repayment plan you create. By the time the automatic protection comes to an end, you will be done paying the mortgage, and the remaining debt will be discharged, allowing you to keep your home. It is worth talking to your attorney about what will happen to your vehicle or home when choosing any of these bankruptcy options.

Can you Retain your Car or other properties?

When determining if bankruptcy is the right option, you must speak to your attorney about what will happen to your vehicle and other properties. The factors that determine what happens to the properties include:

  • What you have done with them
  • The exemption laws present in your case

If you have pledged your car as collateral for the debt, even if you declare bankruptcy, the creditor cannot be stopped from repossessing and putting it up for sale to repay what you owe them.

Under chapter 7, only particular properties are protected by exemption laws. Therefore, you must understand the exempt and non-exempt properties in your case. If you have a substantial amount of debt and equity that is not under the state law’s exemptions, you might end up losing your car or other property. However, when the amount of equity is small,  you can retain your vehicle if it’s exempted.

Will Cosigners be Stuck with Debt?

When determining if bankruptcy is the right option for you, it’s critical to consider cosigners. These are individuals, friends or family, who assisted you in obtaining financing by co-signing the agreement. You don’t want to expose these people to debt when you cannot pay, making it critical to know what happens to them. Under chapter 13, your co-signers are protected, but in chapter 7, cosigners will be stuck with your debt the moment you don’t pay. In a scenario like this, chapter 13 would be the best option for you.

Will Bankruptcy Affect your Personal Life?

When filing for bankruptcy, you have to lay open every aspect of your financial life, exposing you to public scrutiny. In liquidation bankruptcy, your property will be repossessed and sold, while in reorganization bankruptcy, you must ask for permission to spend your money for at least three years. Bankruptcy will invade your personal life.

Find the Right Bankruptcy Attorney Near Me

Bankruptcy is a legal process that requires a lot of legal and practical decisions. You need legal help to unravel these decisions and find out how you can bring your financial life back on track. If you are wondering how you will know whether bankruptcy is the right option, consider consulting with the Los Angeles Bankruptcy Attorney. Contact us at 424-285-5525 for a free consultation.