Filing for bankruptcy is a great option for someone with excessive debt. It helps you clear your finances and reset your credit so that you can get a fresh financial start. The bankruptcy process starts by filling out a petition and documenting your current financial condition, including your income, debts, and assets. Once you have filled out the petition, most creditor collection activities against you will temporarily stop; this is referred to as an “automatic stay.” The automatic stay gives you time to breathe, sort everything out, and begin planning to rebuild your credit.
There are different types of bankruptcies, but Chapter 7 and Chapter 13 are the two that are meant for helping most folks and small businesses. Chapter 7 and Chapter 13 are powerful tools for reducing, restructuring, and eliminating debt, but they’re designed to assist folks in very different financial situations and they provide debt relief in different ways.
It’s important to understand the advantages and disadvantages of filing for bankruptcy. Most everyone is familiar with the negative side of filing bankruptcy, such as the immediate hit it can have on your credit rating. But almost everyone initially overlooks the positives of bankruptcy.
For example, eliminating debt from your credit report actually has a positive impact on your overall credit rating. Similarly, many of the people filing for bankruptcy already have poor credit or couldn’t get financing at a decent interest rate even if they didn’t file bankruptcy, so filing actually doesn’t have much of a practical short-term impact.
Knowing exactly what happens when you file for bankruptcy and understanding the implications will help you make the right choice.
Different Types of Bankruptcy: What Happens When Declaring Bankruptcy
Bankruptcy has different consequences depending on which type you choose to file. Both Chapter 7 and Chapter 13 Bankruptcy have distinct qualifications and outcomes. Understanding each type of bankruptcy and their impact will allow you to make a more informed decision to build a better financial future.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is sometimes referred to as “liquidation bankruptcy,” although most people filing Chapter 7 keep their property and don’t face any liquidation. Only certain non-exempt assets are attached (seized by the trustee) and sold to pay off your debts. Fortunately, we have really powerful exemptions in Texas that protect your personal belongings, car, home, retirement savings and more. However, regardless of whether liquidation occurs in a Chapter 7, most unsecured debt is completely discharged without any repayment whatsoever.
Before filing the bankruptcy petition, you must collect all of the necessary paperwork needed to prepare your case. You must also complete a credit counseling class before filing—this course can be taken online or over the phone and usually costs around $20 to $50. Between four to six weeks after filing you’ll attend your creditors meeting (aka 341 Meeting) where the bankruptcy trustee will ask you questions based on your petition and additional documents you provided prior to the meeting. The purpose of the 341 Meeting is to verify the accuracy of your bankruptcy petition and determine whether any qualifying nonexempt property exists for the trustee to administer (meaning for them to take, sale, and distribute to your creditors).
Most, and in many cases all qualifying unsecured debt is discharged within three to six months after filing for Chapter 7 bankruptcy in most cases. For most folks this means that all of the credit card debt, medical bills, personal loans, and more are completely wiped out by the bankruptcy discharge. One of the immediate benefits of this debt relief is saving the money that was being used to pay the debt, but another often overlooked benefit is that the discharged debt is removed from your credit report. Clearing the debt off your credit report gives you the opportunity to begin building good credit shortly after the bankruptcy is complete, or as you’ll hear others say it gives you a fresh financial start.
Chapter 13 Bankruptcy
Unlike Chapter 7, Chapter 13 bankruptcy is focused on restructuring and repaying at least some your debt rather than straight up discharging them. Chapter 13 bankruptcy is a useful tool for folks who don’t qualify for Chapter 7 and can’t afford to make all of their debt payments. Chapter 13 is also an extremely effective way to stop foreclosure and repossession. Another reason some folks choose Chapter 13 bankruptcy is because you can keep all of your property regardless of the exemptions.
When you file, most of the creditor's actions end immediately (a.k.a. “the automatic stay”), including evictions and foreclosures. This provides real relief and allows the bankruptcy to get started, allowing you three to five years to repay the outstanding balance(s) instead of trying to come up with the money seemingly overnight.
In this type of bankruptcy, people reorganize their debts by eliminating and reducing interest, eliminating negative equity when possible, catching up on late payments, and prioritizing repayment of certain debts instead of others. Once the process begins, folks spend up to three to five years making specific payments for their debt and any remaining unpaid debt is typically discharged when the process is finished.
To file Chapter 13 bankruptcy, you must provide all of the details regarding your finances, including your income, assets, debts, and necessary expenses. You’ll also be required to take a credit counseling class before filing, which typically costs between $20 and $50.
After filing you’ll be required to make your first plan payment within the 30 days, even though your petition and Chapter 13 plan aren’t approved and confirmed yet. Within four to six weeks after filing Chapter 13 you’ll attend your 341 Meeting (a.k.a. meeting of creditors) where the trustee will ask you questions about your financial situation and review your budget to ensure you can successfully complete your Chapter 13 repayment plan. Your Chapter 13 repayment plan will typically be approved within three to four months after filing.
Once the repayment plan is approved by the bankruptcy court, you’ll make one monthly payment to the trustee and it’s their responsibility to make sure the creditors are paid. Every year you’ll provide the trustee a copy of your tax return and they’ll determine whether your income has changed enough to result in an increase or decrease in your plan payment. If you experience changes to your income or expenses you’ll have an opportunity to modify your plan. Otherwise, if you’re unable to keep up with your plan payments your case will be dismissed and you won’t receive a bankruptcy discharge.
Discharged & Undischarged Debts in Bankruptcy
Discharged Debts
Discharged debts refer to those debts that the bankruptcy court has erased. Following a discharge, the individual is not legally required to pay the debt. Common examples of discharged debts include:
● Collection accounts
● Business debts
● Back rent
● Unsecured loans
● Credit cards.
● Medical bills
● Loans from family or friends
● Past-due utility payments
● Toll bills
● Payday loans
● Signature loans (personal loans)
This information may offer some consolation to people who are struggling to get their financial health back on track. However, before a firm decision is made, it is advisable to consult a bankruptcy attorney to ensure that your particular debts can be discharged.
Undischarged Debts
On the other hand, there are bad debts that an individual cannot discharge after filing for bankruptcy. These debts typically include:
● Certain tax debts
● Government fines and penalties
● Debts not listed in your filing
● Alimony and child support
● Debts for willful and malicious injuries to persons or property
● Government-backed loans
● Retirement plan loans
For those contemplating bankruptcy, it is important to distinguish the kinds of debts that can be eliminated and those that cannot so that they can have a fully accurate sense of what bankruptcy can offer.
The Truth about “Consequences” to Consider Before Filing for Bankruptcy
The conversation around bankruptcy is almost entirely dominated by the negative aspects and the benefits of bankruptcy are usually completely overlooked. In fact, much of what people think they know about bankruptcy is incorrect because it’s truly only part of the picture. Here are a few examples of things that everyone thinks they know about bankruptcy along with the part that’s left out and overlooked.
1) Negative Impact on Credit
Everyone knows that bankruptcy will ruin your credit, right? Wrong. In fact, we see many of our clients get a boost to their credit score within a week after filing. To be clear, these folks typically have poor scores to begin with, but focusing on the increase helps make the point that by removing debt from your credit report your credit score can finally begin increasing.
Why? Because debt causes bad credit. This is the part the people forget when they talk about the negative impact bankruptcy will have on your credit. This “consequence” is barely a consequence at all because it fails to acknowledge the credit situation for folks who are considering bankruptcy in the first place.
In reality, folks considering filing bankruptcy have two choices. They can continue struggling with debt and allow their credit to flounder for years while they try paying off the debt or they can file for bankruptcy and spend the next several years saving money and have an opportunity to build good credit. If it’s not clear, the second option often sets people up to achieve greater financial security much sooner than the first option. The person who files bankruptcy can have their credit back in fighting shape while the other person is still struggling with repayment and mediocre credit.
“But what about folks with good or average credit?” This is is where it’s important to remember that your credit score isn’t everything. If you don’t believe me ask anyone who’s every tried buying a home and couldn’t because their debt-to-income ratio was too high. That’s right, you can have a decent or even a good credit score and still have too much debt to be truly credit worthy. You know how you fix that? By getting out of debt, and that’s exactly what bankruptcy is designed to do. So in that scenario it’s true that the person’s credit score drops, but in reality they weren’t truly credit worthy anyway so filing bankruptcy doesn’t actually change anything in a practical sense—they couldn’t get a loan on good terms prior to filing and they won’t be able to in the short-term after filing either. The difference, again, is that bankruptcy allows them to repair their credit in just a few years so they can actually be credit worthy and have a good credit score..
2) Property Loss
It’s undeniable that sometimes there are hard decisions to make in order to file bankruptcy and sometimes those decisions can include parting with certain property. Here’s the thing though, most folks who loose property in bankruptcy know that they’ll give up the property prior to filing, but they choose to file anyway because they see more value in getting out of debt rather than holding on to the property. When you think about it in those terms you can still see that there’s actually more to gain by filing bankruptcy, even when it means giving up certain property.
Another thing to consider on this point is that many folks actually choose to give away property in bankruptcy. This happens frequently for folks with negative equity, clunker cars, etc.
3) Impact on Co-Signors
This is something that certainly presents a real issue sometimes, but it can be helpful to understand exactly what happens to a cosigner when filing bankruptcy. If you and your cosigner both looked at your credit reports together you would both see an account listed on both of your credit reports for the debt you’re both cosigned onto. If you looked further you would see that the one of the pieces of information on the credit report is the “status.” When one of you files for bankruptcy that account status will change to “included in bankruptcy” on both of your credit reports. For the person who filed bankruptcy they would see that change applied to all of the accounts on their credit report, and toward the end of the credit report the would see their bankruptcy listed in the section for evictions, judgments, and bankruptcies. So the truth is that it will impact the non-filing cosigner’s credit, but it won’t be an overwhelming blow and it won’t compare to the impact that actually filing would have.
4) Some Debts Remain Undischarged
While it’s true that some debts don’t get discharged in bankruptcy, what tends to happen is that by discharging the rest of the debt folks end up with enough money to repay the non-dischargeable debt so they can be completely debt free. It’s important sometimes to remind ourselves not to let perfect be the enemy of good; just because you can’t have one-hundred percent isn’t a good reason to not accept and be happy with eighty percent.
Bankruptcy Effect on Employment
This is a real fear but it’s largely not based on real consequences. There are laws against employment discrimination for bankruptcy with an exception for jobs that require certain financial accountability as a core function of the job. Additionally, for folks worried about security clearances the real concern is debt, because that’s a prime target to leverage and try blackmailing folks into providing secret information.
Can I Check Bankruptcy Filings Publicly?
The Public Access to Court Electronic Records (PACER) system saves the bankruptcy records. That is accessible to the public if they have the registration number. The service charges $0.10 per page, though at most $3 per document; documents that cost less than $30 per quarter will have no fee. BUT almost nobody is doing this.
Importance of Monitoring Your Credit
As we know, bankruptcy will affect credit reports, so reviewing your credit score regularly after a bankruptcy declaration is essential. It will help you understand the possibilities for restoring credit after filing for bankruptcy to regain your financial stability.
Consult a Bankruptcy Attorney
Bankruptcy can be a great way for some people to get their financial life back on track. However, if one decides to file for bankruptcy, it is essential to consider all the potential ramifications, both positive and negative, and to consider other solutions aside from bankruptcy. In general, a person should not have “tunnel vision” with respect to bankruptcy, but should always be willing to weigh different options and alternatives. If one needs clarification, it is OK to consult a financial counselor or an attorney, depending on the case. You can get help from Kannon Moore Law Firm to get an attorney who will best guide you.
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