When struggling with debt, bankruptcy is an option that you might consider. A way to start over financially and clear money owed to creditors, declaring bankruptcy might seem attractive when circumstances seem overwhelming. It isn’t for everyone though and before you make the decision, you should seek legal advice and read as much as you can about the process.
Eligibility for bankruptcy
There is more than one reason why declaring bankruptcy might not be for you. And, one of the factors you will need to consider is your ability to pay your debts. It could be that there is a better option for you. While you may be able to avoid foreclosure and repossession of your property, bankruptcy will affect your credit. It will also make it more difficult to get new loans or credit on good terms and could mean that you find yourself discriminated against in employment and when renting from a landlord. You should speak to both a debt counselor and an attorney to work through your options.
There are two types of bankruptcies that individuals with unmanageable debt usually explore. They are Chapter 7 and Chapter 13 bankruptcy, and which one you choose is dependent on your circumstances.
To apply under Chapter 7, your income has to either be below the state median or you will have to take a “means-test.” Your monthly net income over the previous 5-year period needs to be below $12, 475 or be less than 25% of your non-priority unsecured debt to qualify. There are statutory expense exemptions and special circumstances that will apply. A bankruptcy filed under Chapter 7 requires liquidation of most of your assets to pay off your debts and can take 3 to 6 months to be fully processed.
If you have a steady income or have failed the “means-test”, Chapter 13 offers the opportunity to create a monthly payment plan, discharged over a 3 to 5 year period. Chapter 13 bankruptcy can help you avoid foreclosure and repossession of property including your home and car. If you can pay your mortgage and have a reliable income, a Chapter 13 will force your lenders to accept certain payment terms, and once the payment period is over, you will no longer owe any of the dischargeable debts listed in your claim.
Filing for bankruptcy
Before you can file for bankruptcy you must read the “Notice to Consumer Debtors.” The notice will encourage you to use the services of a bankruptcy attorney and tell you about the “credit counseling” session you must attend before filing and the debtor education course you must complete after you have filed for bankruptcy. The notice details the different types of bankruptcies a person or business can file under and underscores the importance of completing paperwork honestly and completely. Failure to do so could result in a fine or imprisonment.
There are different forms to complete, including petition and schedules forms which give further information about your finances. Among the things you will need are:
– Copies of your credit report from three different credit bureaus (Equinox, Experian and Transunion)
– A detailed list of your up-to-date secured and unsecured debts, including those that are not on your credit file or are owed to private individuals
– A “Declaration of Homestead” which can help protect the equity in your home against unsecured creditors
You will also need to file your income tax return before you can file for bankruptcy and collect all the documents listed in the documents checklist.
The filing fee for Chapter 7 is $335, though this can be waived if you are on a low income, or broken down into 4 installments. The fee for Chapter 13 is $310 and this can also be broken down into 4 smaller payments.
Credit counseling and your debtor education course
You must get a certificate for completing credit counseling within 180 days of filing for bankruptcy. A Q&A session that must be undertaken by an approved non-profit credit counseling agency, this ensures that bankruptcy is right for you and takes anywhere from 45-90 minutes to complete.
Once you have filed your paperwork with the bankruptcy court, you will need to follow up the first session with a debtor education course. The course is designed to advise you on managing your personal finances after bankruptcy and takes approximately two hours to complete. Like credit counseling, you can do it on the telephone, in-person or on the Internet.