You might be thinking about declaring bankruptcy if your debt has become unmanageable and you are probably facing a foreclosure on your home. While bankruptcy can take the stress of debts off your shoulders and give you peace of mind, it has some severe consequences that are worth considering before you finally decide to file for bankruptcy. For instance, upon filing for bankruptcy, the bankruptcy will appear on your credit report for seven to ten years, depending on the type of bankruptcy.
A bankruptcy record could make it difficult for you to apply for other loans, including credit cards, mortgages, and car loans in the future. A bankruptcy record could lead to difficulties trying to rent a house, get a job, and lead to higher insurance rates. However, this should not make you shy away from bankruptcy. An experienced bankruptcy attorney can make the process easier by explaining how bankruptcy works and helping you understand alternatives to bankruptcy.
Before You File For Bankruptcy
Bankruptcy is often the last resort for people who have debt problems with no way of paying their bills. Before you decide to file for bankruptcy, it is essential to explore other options that might not significantly impact your credit history. The alternatives to bankruptcy are not just favorable to your credit record but are often less costly than bankruptcy.
One alternative is negotiating with your creditors. You should contact your creditors and find out if they are willing to negotiate. Some creditors might be willing to accept reduced payments over an extended period instead of waiting for a bankruptcy settlement where they might end up getting nothing. If you are struggling to repay your home mortgage, you should contact your loan servicer to learn about your options. Some lenders might be willing to postpone the payments for a certain period, commonly known as forbearance. Your mortgage lender might agree to reduce payments, spread over a more extended repayment period.
You should also consider loan modification programs that lower the loan interests for the remaining loan period. Even the IRS (Internal Revenue Service) is often available and willing to negotiate. You may be eligible for an offer if you owe taxes. In this agreement, the IRS will accept lower payment amounts. The IRS may also offer you a payment plan that allows you to pay the taxes you owe over time.
Filing For Bankruptcy
When you finally decide to file for bankruptcy, you might be wondering about the steps you should take. It is advisable first to contact an attorney before you initiate the bankruptcy process. It is possible and legally allowable to file for bankruptcy without the help of a bankruptcy attorney. However, because bankruptcy has long-term legal and financial outcomes, it is advisable to seek the counsel of an experienced bankruptcy attorney. Federal law governs the bankruptcy process, with most bankruptcy cases being handled in the federal bankruptcy courts. Some bankruptcy rules may vary from state to state.
Bankruptcy attorneys understand every aspect of bankruptcy, making them most suited to guide you through the process. Before filing for bankruptcy, many people attend counseling sessions conducted by a counseling organization approved by the Department of Justice's United States Trustee Program. The counselor will evaluate the applicant’s financial situation, help devise a budget plan, and recommend alternatives to bankruptcy.
According to the Federal Trade Commission, bankruptcy counseling costs around $50, but it is offered free if the applicant cannot afford to pay for the counseling services. If you still wish to continue with bankruptcy after counseling, your bankruptcy attorney will help you choose the best type of bankruptcy.
Types Of Bankruptcy
There are mainly three typical types of bankruptcy:
- Chapter 7 bankruptcy
- Chapter 13 bankruptcy
- Chapter 11 bankruptcy
Chapter 7 Bankruptcy
Chapter 7 bankruptcy involves liquidating your assets to enable you to repay your creditors. Some items are exempt from liquidation, meaning that the debtor gets to keep them. The exempt items include:
- Equity in the debtor’s home and vehicle
- Clothing
- Personal items
- Pensions
- Tools required for your employment
- Social security benefits and other public benefits
All the remaining non-exempt items will be liquidated or sold by a trustee. The bankruptcy court appoints a trustee who disposes of the debtor's assets and distributes the proceeds to creditors. Non-exempt property that is disposed of in bankruptcy may include:
- Investment accounts
- Bank accounts
- Recreational vehicles
- Boats
- Other valuable items
At the end of Chapter 7 bankruptcy, most of the debts are discharged, and the debtor will be under no obligation to repay them. However, certain debts cannot be discharged in bankruptcy; these debts include:
- Taxes
- Child support
- Student loans
Chapter 7 bankruptcy is often suitable for debtors with few assets and low income. In determining whether a debtor is eligible for Chapter 7 bankruptcy, a means test is conducted.
Chapter 13 Bankruptcy
In this bankruptcy proceeding, the debtor undertakes a reorganization of their finances under the approval and supervision of the bankruptcy court. In this bankruptcy, your assets will not be liquidated, but you must agree to repay your debts over a particular duration, usually three to five years. You can opt for a Chapter 13 bankruptcy if you want to keep your non –exempt property intact. You can also choose this type of bankruptcy to help you buy time before property seizures and foreclosures. You might be wondering whether you are eligible to file for Chapter 13 bankruptcy. The following qualify to file for Chapter 13 bankruptcy:
- Individuals
- Married couples
- People who operate unincorporated businesses
- People in self-employment
Chapter 13 bankruptcy involves a reorganization, known as a wage earner’s plan whereby debtors submit to follow a set repayment plan to repay their creditors over three to five years. While filing for Chapter 13 bankruptcy, you must compile a list of all your creditors, with the amount of money you owe each.
You have to compile a list of your property and your income, sources, and amount, as well as detailed information about all your monthly expenses. You will pay an agreed-upon amount every month to a bankruptcy trustee, who will then distribute this money to your creditors.
Under Chapter 13 protection, you will not have direct contact with your creditors, meaning that you will not receive threatening calls from them. To be considered eligible for Chapter 13 bankruptcy, you must have completed credit counseling, and your debts must be below a specific limit.
Most debtors are motivated to choose Chapter 13 bankruptcy over Chapter 7 bankruptcy to save their homes. Chapter 13 is a more accessible alternative than Chapter 11 bankruptcy. It is ideal for bankruptcy filers who make too much money to be considered for Chapter 7 bankruptcy. Filing for a Chapter 13 bankruptcy will also protect the cosigners of your loans from being held responsible for those loans.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is also known as a reorganization bankruptcy. It involves reorganizing a debtor's debts, business affairs, and assets. Even if individuals may file for Chapter 11 bankruptcy, this type of bankruptcy is mainly suitable for corporations. A corporation may file for Chapter 11 bankruptcy if it requires some time to restructure its debts. This type of bankruptcy enables a debtor to have a fresh start. However, a debtor will have a duty to fulfill all the obligations under the reorganization of all types of bankruptcy. Chapter 11 bankruptcy is the most complex and also the most expensive. Therefore, before a company considers Chapter 11 bankruptcy, it should carefully explore and analyze all other alternatives of dealing with debt.
The bankruptcy courts help a business to restructure its obligations and debts during Chapter 11 bankruptcy. In most cases, a business remains open and operational after filing for Chapter 11 bankruptcy. If a person has a lot of debt and does not qualify for Chapter 7 and Chapter 13 bankruptcy, they may be eligible to file for Chapter 11 bankruptcy.
Even after filing for Chapter 11 bankruptcy, the debtor in possession continues to run the business. However, in a case involving fraud, gross incompetence, and dishonesty, a court-appointed trustee runs the business or company throughout the bankruptcy process. In this case, the business will have to seek the court's approval before making certain decisions. The court will have control over decisions relating to entering contracts with unions and vendors.
Chapter 7 Bankruptcy Means Test
You do not have the ultimate control over whether to file for Chapter 7 or Chapter 13 bankruptcy. Courts often impose a means test to determine whether an applicant is eligible for Chapter 7 bankruptcy. A mean test involves comparing your average income for the last six months with the median income of other similar households in California. You should be eligible if you earn less than the median income of other similar households.
You may still be eligible for Chapter 7 bankruptcy even if your income is higher than the median. You might qualify after subtracting the allowable expenses. The court may decide that Chapter 13 bankruptcy is your only option if it is evident that you have ample income to start repaying your debts instead of having the slate wipes clean.
Categories of Debts
When applying for bankruptcy, the court will require you to provide them with a list of all the debts you owe. There are two main debt categories:
- Secured debts
- Unsecured debts
Secured debts are loans in which the creditor has an interest in property you provided as collateral while applying for the loan. The most common types of secured loans include car loans and mortgages. Unsecured debts are not secured by any collateral. Examples of unsecured debts are medical bills, credit cards, and personal unsecured loans.
When handling bankruptcy cases, the bankruptcy court considers secured debts to be of higher priority. If the debtor fails to pay, the creditor can claim the property that serves as collateral. When the applicant files all the essential information with the court, the court appoints a bankruptcy trustee to oversee the bankruptcy proceedings. The role of a bankruptcy trustee is to ensure that your loans are repaid over a given period. When filing for bankruptcy, the court issues an automatic stay that prevents creditors from harassing you and seizing your property through foreclosure or property confiscation.
Discharge of Your Debts
When the bankruptcy court discharges your debts, you will be free from the responsibility of paying back the listed debts. Your creditors will not have a legal claim over the discharged debts and cannot pursue or initiate any collection activity against you. After discharge of your debts, your creditors can no longer communicate with you in any way or file a legal action against you.
The court will issue a notice to your creditors, informing them that your debts have been discharged. The court will also send a copy of the notice to your bankruptcy attorney and the United States Trustee Program. If a creditor receives the discharge notice but still attempts to collect from you, they could be subject to a fine. If you file for Chapter 7 bankruptcy, the court will issue a discharge notice between four and six months after you file the bankruptcy petition. If you file for Chapter 13 bankruptcy, the court will issue a discharge after completing the repayment plan, which occurs between three and five years after a bankruptcy filing.
Rebuilding Your Credit After Bankruptcy
Filing for bankruptcy gives you relief from a new financial slate. However, it might take a long time before you have decent credit again. A bankruptcy will stay on your credit report for ten years. However, the good news is that the impact of bankruptcy on your credit score will fade over time. If you show that you are using credit responsibly, your credit score will gradually improve. After filing for bankruptcy, you might assume that credit card issuers and lenders will want nothing to do with you, but this is not entirely true. Of course, you will have to prove yourself to the lenders, but it is doable. Below are some of the steps that you can follow to rebuild your credit score after bankruptcy:
Check Your Credit Reports
You should check your credit reports to ensure that they do not contain inaccurate negative information. Your credit score is calculated based on the information contained in your credit report. Therefore, any erroneous information in your credit report could make it harder for you to get out of your financial situation. If you find any incorrect information in your credit reports, file a dispute and have this information corrected.
Of course, you cannot get rid of all negative information from your credit report. Even if bankruptcy reorganizes your debts and wipes out some of them, it does not erase data from your credit reports. Your credit report will still show a Chapter 7 or Chapter 13 bankruptcy. Debts that go into a collection and late payments will still show on your credit report. You will have to be patient and wait for this information to get off your credit reports.
Seek A Credit Product That Is Ideal For Your Situation
After filing for bankruptcy, many lenders will consider you an extremely risky borrower. Several credit products are designed to help you improve your financial profile. First, you should consider getting a secured credit card. A secured credit card will be backed by a deposit amount you make. Your credit limit will be the same as the amount you place as a deposit.
A secured credit may have high interest rates and an annual fee, but you will not need it in the long term. You can use the secured credit card to mend your credit until you become eligible for an unsecured credit card. It is important to note that you can be rejected for a secured credit card. Therefore, you should ensure that you read all the requirements carefully to ensure that you will be approved.
You should also look for a cosigner for your loan or credit card application. A cosigner can help rebuild your score. You will need to have a family member or a friend with a good credit history willing to co-sign your loan or credit card application. A cosigner will be risking their credit reputation by signing for you. You should ensure that you repay your loans as agreed to avoid ruining their credit history.
You can also apply for a secured loan or a credit-builder loan. Community banks or credit unions commonly offer these types of loans. You can borrow money against the money you already have. While you are repaying the loan, you will not be able to access that money. The other form of borrowing is affected without cash upfront. The money loaned to you will be placed in a savings account and released when you make necessary payments. In return, the financial institution will send a report about your payment history to the credit bureaus.
Create A Budget
If you fail to build a budget, you might get back into the financial habits that made you file for bankruptcy. Creating a budget and following it will help keep your finances in check and prevent you from unplanned spending.
Building An Emergency Fund
Having some money as savings can prevent you from resulting in high-cost loans in the face of an unexpected expense. The costly debts could lead to a new debt spiral. Ensure that you do not spend all the money you get. Tuck away some cash for unexpected expenses.
Find A Los Angeles Bankruptcy Lawyer
If you intend to file for bankruptcy, a bankruptcy attorney will come in handy in guiding you through the process and helping you weigh your options. At Los Angeles Bankruptcy Attorney, we can guide you through the bankruptcy process and answer any questions that arise. Contact us at 424-285-5525 and speak to one of our attorneys.
