Filing for bankruptcy gives you a second chance at life but you should not file at the first sign of financial distress because it has both long-term and short-term consequences.
Before filing, you need to do these things-
- Stick to a budget
- Talk to your creditors and try making a payment plan.
- Go for credit counseling.
Doing these things will give you a better perspective of your financial situation and help you make the decision better.
What is bankruptcy?
Bankruptcy is a process where you can get rid of some or all debts with the help of the court. There are two ways you are declared bankrupt which is
- You file for bankruptcy, OR
- Your creditors ask the court to declare you bankrupt.
There are 2 common chapters under which you can file-
It is also known as liquidation or straight bankruptcy. Here, all your non-exempt properties are sold and are used for repaying some of your debts, and the rest of the dischargeable debts are discharged. There are some criteria you need to fit, some of them are-
- Your income is high than the limit.
- You can repay your debt.
- Your bankruptcy case was dismissed within the last 180 days.
- You attempted fraud.
- Chapter 13 –
It is also known as the repayment chapter, here you with the help of the court will create a repayment plan for 3-5 years, where you will repay most of your debts. Some if left is discharged. It is usually done when your income is higher than the limits set for chapter 7 bankruptcy or if you have a lot of non-exempt property.
Some of the eligibility requirements are-
- You took credit counseling
- You are not a business
- Your previous chapter 13 case was not dismissed within the past 180 days if you had any.
- You have not filed a chapter 13 case in the last 2 years.
Things to know before filing for bankruptcy-
- Not all debts can be discharged-
Debts like child support, student loans, alimony, etc. cannot be discharged. But debts like credit card debt, and medical bills can be discharged.
- Filing for bankruptcy will have a long-term effect on your credit score-
It will show on your credit report for up to 10 years and it will be very difficult for you to get loans. But it is not impossible, you can increase your credit score slowly.
- Your co-signer will have to pay your debt-
Even if your case is successful your creditors can go to your co-signer asking for them to clear your debt, especially in chapter 7, but in chapter 13 the creditors cannot go to the co-signer until and unless you are not paying them according to your repayment plan.
Filing for bankruptcy during a pandemic-
Filing for bankruptcy during any national emergency is very challenging. You will need to make sure that your local court is open or not and be sure that they are taking a bankruptcy case currently or not. There will be a delay if your case is filed due to restricted hours.
The federal government may even intervene and sometimes pass a stimulus bill.