Making the decision to file bankruptcy should not be taken lightly. While it may seem like the perfect solution for wiping out your debt, you will face consequences. Your credit score will decrease and your bankruptcy will remain on your credit report for ten years when you file Chapter 7, and seven years when you file Chapter 13. You may find it difficult to find a job or rent an apartment.
When to Consider Bankruptcy
Are you unable to pay your bills in a timely manner? Are you in danger of losing your home? If so, you may be thinking of bankruptcy to stop foreclosure and find a manageable solution to your financial crisis. It could be the only solution in some instances, but there are consequences. Bankruptcy information remains on your credit report for several years and makes it more difficult to get credit.
Is Filing Chapter 7 Bankruptcy a Bad Idea?
Anyone who has dealt with financial challenges for a long period may think about bankruptcy. Are your debt payments past due? Are you receiving frequent phone calls about late or missing payments? Maybe you’ve wondered if bankruptcy would provide relief from the stress. Bankruptcy can make your debts “disappear,” — sounds like a great idea. The bankruptcy court will discharge your debts, and you can start over.
Advantages to Chapter 7 Bankruptcy
- You are free of your debts and can get a fresh financial start.
- Any income or property you acquire after filing Chapter 7 does not become part of the bankruptcy. A few types of property do become part of the bankruptcy estate if acquired within 180 days of filing. This includes property you inherited; property acquired as part of a divorce or settlement agreement; benefits received due to a death; and life insurance proceeds.
- There is no limit on the amount of debt you are allowed.
- Once debt is discharged, you are no longer obligated to repay it.
- The court will discharge the debts within 60-90 days after the initial bankruptcy filing.
Disadvantages of Filing Bankruptcy
A bankruptcy petition automatically places a stay on foreclosure so you don’t lose your home, but it may cause difficulty in other ways.
- You may have trouble obtaining a credit card, mortgage, or loan.
- Bankruptcy may affect insurance premiums.
- You may have difficulty getting approved for an apartment or finding a job.
How to File for Bankruptcy
Once you decide to file for bankruptcy, you will need to consult with a bankruptcy attorney. It is possible to file without one, but doing so is not recommended due to the financial implications involved. You will also need to participate in a counseling session with an approved credit counseling company. The counselor will work with you on the following:
- Review your financial circumstances.
- Discuss bankruptcy alternatives.
- Work with you to develop a budget.
Bankruptcy advisory services can help you determine whether bankruptcy is your best option, and which type is right for you.
What Will I Lose in Chapter 7?
When you file a Chapter 7 bankruptcy petition, a federal trustee will be appointed. The trustee’s job is to supervise the sale of nonexempt assets that may include:
- Real estate other than your primary residence
- A late-model vehicle in which you have equity
- High-ticket musical instruments not needed in the performance of your profession
- Valuable collections of stamps or coins
- Investments not part of retirement accounts
- Expensive works of art
- High-priced clothing
- Jewelry collections
The proceeds from the sale of assets are applied toward the balances you owe creditors. Any remaining balance will be discharged by the court. The following debts are exempt from discharge:
- Child support
- Student loans
- Court-ordered alimony
- Most lawsuits, especially those involving personal injury
What Is the Income Cutoff for Filing Chapter 7?
To determine whether you qualify to file a Chapter 7, you will take a means test. The test evaluates your monthly income for the preceding six months. It is then compared to the median income of similar households in your same state. If your income is below your state’s median, you qualify to file bankruptcy. Even if your income exceeds your state’s median, you may still qualify. This depends on whether your allowable expenses leave enough for reasonable payments to your creditors.
Filing Bankruptcy as an Alternative for Back Taxes
If you owe back taxes, IRS back tax debt solutions may be of help to you. The IRS may negotiate a plan allowing the taxpayer to pay a reduced amount. They may also offer an extension. In some cases, they may be willing to forgive the debt completely. Back income taxes may not be discharged in bankruptcy, even in a Chapter 7. However, in a Chapter 13, you may include them as part of the payment plan.
Consider Alternatives to Bankruptcy
Bankruptcy should never be the first solution to financial problems. Use it only after considering all other possible solutions. Some less costly alternatives may possibly cause less damage to your financial future as it relates to your ability to obtain credit.
Contacting your creditors to determine if they are willing to negotiate is one possibility. While this doesn’t always work, some creditors may agree to reduce your payments for an extended period. They often prefer this over the risk of losing all payment in a bankruptcy settlement.
When it comes to your home mortgage, start by contacting the mortgage company. Explain your situation and find out any available options. Some possibilities include:
- Agreeing to forbearance
- Setting up a modified payment plan
- Applying for loan modification through an approved government or private program
Where to Find Professional Bankruptcy Help
If you need to find ways to stop foreclosure immediately or are just unable to make your monthly payments, bankruptcy may be your best option. However, it should be your very last alternative. Before you decide, make sure you research on all the possible options and choose the best one for you. Discuss your options and what to expect with a professional. Our network of legal professionals can guide you through the process and help you make the best choice for you.
If you would like a free consultation from a non-profit credit counseling agency, Credit Yogi can help you. Call 866-964-9644 now. You’ll be happy you did. Our database includes over 160,000 professionals operating in every zip code in the United States. It’s 100% FREE and you never have to hire anyone. Ever.