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Best Bankruptcy Guide: How it Works, Consequences and Alternatives.

Allentown Business School

Filing for bankruptcy is a big decision. It can be hard to know if bankruptcy is the right choice for you, and it’s essential to understand all of the consequences involved.

This blog post will break down everything you need to know about bankruptcy: what it is, how it works, the consequences, and whether or not it’s worth it.

We’ll also provide some resources to get help if you’re considering bankruptcy.

What is bankruptcy, and how does it work

Bankruptcy is a legal process in which a court and bankruptcy trustee examine the assets and liabilities of people, partnerships, and businesses who believe they may not be able to pay their obligations.

How soon can you be debt free?

In the bankruptcy process, the bankruptcy court decides whether to eliminate the debts, which means that individuals or firms who owe money are no longer legally obliged to do so. If the court feels that the person or firm has adequate assets to pay its obligations, it may also terminate the case.

There are several types of bankruptcy, but the most common bankruptcy proceedings are chapter 7 bankruptcy, also known as liquidation bankruptcy, and chapter 13 bankruptcy, also known as a reorganization bankruptcy.

An individual or business must first meet specific eligibility requirements to file for Bankruptcy Discharge.

Automatic stay

Once bankruptcy is filed, an individual or business is protected from creditors’ collection efforts by the automatic stay. The automatic stay is a court order that stops creditors from taking any action to collect on a debt.

This includes wage garnishment, foreclosure, repossession, and collection calls. Creditors who violate the automatic stay may be held in contempt of court and fined.

341 meeting

Once bankruptcy is filed, the debtor must attend a meeting of creditors, also known as a 341 meeting.

The debtor will be questioned under oath about their assets and debts at this meeting. The trustee will also have an opportunity to ask questions.

After the meeting of creditors, the bankruptcy court will issue a Bankruptcy Discharge order that wipes out certain qualifying debts. The debtor is no longer legally responsible for repaying these debts.

Type of debt that qualifies for bankruptcy

Several types of debt can qualify for bankruptcy. The most common type is unsecured debt, which includes:

  • Credit card debt
  • Medical debt, and
  • Personal loans
  • Private Student Loans

This type of debt is not backed by any collateral, so if you can’t pay it back, the lender may not be able to recoup their losses. 

Can you file bankruptcy on student loans?

Filing bankruptcy on student loans is a difficult process.

The first thing you need to do is prove that you have an undue hardship, which is defined as an inability to maintain, based on current income and expenses, a “reasonable” standard of living for yourself and your dependents if forced to repay the loans.

Then, you must file a separate bankruptcy proceeding called an Adversary Proceeding, in which you request that the bankruptcy court declare your student loan debt discharged.

This is a difficult burden to meet, and very few people are successful in getting their student loan debt discharged through bankruptcy.

If you are considering bankruptcy as an option to deal with your student loan debt, you should speak with a bankruptcy attorney to discuss your particular situation.

Bankruptcy doesn’t always help

Not every financial responsibility is erased by bankruptcy. It does not discharge any of the following kinds of debts and obligations:

How soon can you be debt free?
  • Federal student loans (unless you meet very strict criteria)
  • Court-ordered alimony and child support
  • Debts that arise after bankruptcy is filed
  • Some debts incurred in the six months before filing bankruptcy
  • Some taxes(Discharge: Will eliminate (discharge) personal liability for tax debts older than three years unless returns filed late.)
  • Loans obtained fraudulently
  • Debts from personal injury while driving intoxicated

How do you know if bankruptcy is the right option for you

Should You File for bankruptcy? If you’re thinking about bankruptcy, consider whether you could realistically repay your debts in less than five years. If the answer is no, it’s time to look into declaring bankruptcy.

This is based on the idea that the bankruptcy code was designed to offer people a second chance rather than to sentence them for life.

Bankruptcy is your way out if you’ve been financially devastated by some combination of bad luck and poor decisions, and you don’t see that improving in the next five years.

Other debt relief options

Even if you don’t qualify for bankruptcy, there is still hope for debt forgiveness. A debt management program, debt consolidation, debt consolidation loan, or debt settlement are all viable options for debt relief.

When it comes to resolving debt, each option has a different set of challenges and requires 3-5 years to reach an agreement. None of them assures that all of your debts will be resolved when you finish.

The benefits of bankruptcy

Bankruptcy Law can be beneficial because it gives the person or business a chance to start fresh, without the burden of debt. bankruptcy can also help to protect assets, such as a home or car, from creditors.

In addition, bankruptcy can stop harassment from creditors and collection agencies. however, bankruptcy also has some drawbacks, such as the negative impact on credit scores.

Bankruptcy can also be expensive and time-consuming. if you are considering bankruptcy, it is important to talk to an experienced bankruptcy attorney to discuss your options and find out if bankruptcy is right for you.

The consequences of bankruptcy

Bankruptcy can have many consequences, both financial and personal. First, bankruptcy will stay on your credit report for seven to ten years, making it difficult to obtain an auto loan a new credit card, and other lines of credit.

Bankruptcy will also bring your credit score down, making it harder to qualify for loans with favorable terms in the future.

In addition, bankruptcy may make it difficult to rent an apartment or buy a house, as landlords and mortgage lenders often view bankruptcy as a sign of financial instability. Finally, bankruptcy can be emotionally devastating, leading to feelings of shame, guilt, and embarrassment.

The different types of bankruptcy

People often file for bankruptcy when they can no longer make payments on their debts. There are several different types of bankruptcy, each with its own set of rules and procedures.

The most common type of bankruptcy is Chapter 7 bankruptcy, which involves liquidating assets to pay off debts. Chapter 13 bankruptcy is another common type, which involves reorganizing finances and making a repayment plan.

There are also other types of bankruptcy, such as Chapter 11 bankruptcy, which is typically used by businesses.

No matter what type of bankruptcy is filed, the goal is usually the same: to get a fresh start financially.

Chapter 7 bankruptcy, also known as “straight bankruptcy,” is what most people probably think of when they’re considering filing for bankruptcy.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, often known as “straight bankruptcy,” is the most common type of bankruptcy filed.

You’ll be required to allow a federal court trustee to manage the sale of non-exempt assets under this sort of bankruptcy (cars, work-related tools, and basic household goods may be exempt).

The money you receive from the sale goes towards paying off your debts. After your bankruptcy is resolved, the amount you owe is wiped out. Chapter 7 bankruptcy can’t help you get rid of certain debt obligations, such as alimony and child support. You’ll still have to pay court-ordered alimony and child support, taxes, and student loans.

The long-term effects of a Chapter 7 bankruptcy are severe: you will most likely lose your things, and the bankruptcy filing date will be recorded on your credit report for ten years. You won’t be able to file for bankruptcy under this chapter again for eight years if you get into debt again.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a type of bankruptcy that allows individuals to restructure their debt and repay their creditors over time. Making a plan to repay debts. Chapter 13 bankruptcy is also known as a wage earner’s plan.

This type of bankruptcy is available to individuals who have a regular income and who owe less than $394,725 in unsecured debt and less than $1,184,200 in secured debts.

Under Chapter 13 bankruptcy, individuals must repay their creditors using a court-approved repayment plan. Once you successfully complete the plan, the remaining debts are erased. Chapter 13 bankruptcy may be an option for individuals who are facing foreclosure or who have significant equity in their homes.

Chapter 13 bankruptcy may also be an option for individuals who are not eligible for Chapter 7 bankruptcy. Furthermore, a Chapter 13 bankruptcy will be removed from your credit report after seven years, and you could file under this chapter again in as little as two years.

How to file for bankruptcy

Bankruptcy is a legal procedure that either lowers, restructures, or eliminates your debts. The bankruptcy court will determine whether you get the chance to do so. You can file for bankruptcy on your own or hire a bankruptcy lawyer, which most professionals believe to be the safe path to go down.

Attorney fees and filing charges are examples of bankruptcy costs. Filing fees will still be due if you file on your own. You will be held responsible for filing fees even if you can’t afford to hire an attorney. If you can’t afford to pay an attorney, you may be able to access free legal services from the American Bar Association.

Before you file a bankruptcy petition, you must become familiar with the consequences of filing for bankruptcy. It’s not simply a case of stating that you’re broke before entering court. A procedure – occasionally perplexing, sometimes difficult – has to be followed by individuals and businesses.

The steps are:

  • Prepare your financial records for reporting. Pull your credit report and list your unsecured debts, assets, income, and expenses. This gives you, anyone helping you, and eventually the bankruptcy judge, a better understanding of your situation.
  • Seek credit counseling within 180 days before filing: You can’t file for bankruptcy until you’ve completed the required bankruptcy counseling. It guarantees the court that you understand the legal process and that you explored all other options before going bankrupt. The counselor must be from one of the government’s approved providers, as listed on the United states Courts’ website. Most credit counseling firms provide this service over the internet or by phone, and you receive a certificate of completion after it is finished that has to be included in your paperwork. If you skip the process, your application will be rejected.
  • File the petition: This may be the moment to hire a bankruptcy lawyer if you haven’t already. Individuals who declare bankruptcy do not need legal assistance, but you are taking a significant risk if you represent yourself. Understanding the bankruptcy code federal and state bankruptcy laws, and knowing which ones apply to your case, is essential. Judges are not allowed to give guidance, and neither may court staff. There are several forms to complete, as well as important distinctions between Chapter 7 and Chapter 13 that you should be aware of when making decisions. It’s possible that if you don’t know or follow the proper courtroom procedures and regulations, your case might be decided differently. You’re also taking a chance that the bankruptcy trustee may seize and sell your property if you pursue legal counsel without first consulting an attorney.
  • Meet with creditors: When your petition is accepted, it is assigned to a bankruptcy trustee who schedules a meeting with your creditors for you. You must attend, but the creditors are not required to do so. This is an opportunity for them to ask you or the court trustee questions about your case.

What to expect after you file for bankruptcy

After you file for bankruptcy, the court decides whether to discharge the debts, there are a few things you can expect. First, your credit score will most likely drop. Second, you may have to give up some of your possessions, such as your car or your house to pay creditors.

This is because bankruptcy law requires that you liquidate your assets to pay off your debts. Finally, bankruptcy will stay on your credit report for seven to ten years.

This can make it difficult to rebuild your financial life after bankruptcy. However, it is possible to rebound from bankruptcy with time and effort. With a solid plan and a fresh start, you can slowly rebuild your credit and improve your financial situation.

How to rebuild your credit after bankruptcy

Bankruptcy can be a difficult thing to overcome, but it is possible to rebuild your credit after bankruptcy. 

  • Start by getting a copy of your credit report
  • Dispute any inaccurate information on your report
  • Begin building a positive credit history by opening a secured credit card account
  • Pay your bills on time and in full each month
  • Monitor your credit score and credit utilization ratio
  • Request a higher limit on your secured credit card account

How long after bankruptcy can you buy a home

Most lenders will require you to wait at least two years after your bankruptcy Relief date before they’ll consider approving you for a loan.

During that time, it’s important to work on re-establishing your credit by making all of your payments on time and keeping your balances low.

You should also start saving up for a down payment, as most lenders will require at least 10% down on a home loan.

Alternatives to bankruptcy

For individuals and businesses struggling with debt, bankruptcy may seem like the only way out. However, there are several alternatives to bankruptcy that can help you get your finances back on track. 

Consider the Followings:

Debt consolidation

Debt consolidation is one option for those struggling with debt. This process involves combining all of your debt into a single loan with a lower interest rate. This can make it easier to manage your payments and may help you save money on interest.

Credit counseling

If you’re considering bankruptcy, credit counseling may be a good option for you. This process involves meeting with a credit counselor to develop a repayment plan to manage your debt. This can help you avoid bankruptcy and may also help improve your credit score.

It’s important to do your research before choosing a credit counseling program to ensure you’re getting the best service possible.

Debt settlement

Debt settlement is another option for those struggling with debt. This process involves negotiating a repayment plan with your creditors to reduce the amount you owe. This can be a helpful option if you’re unable to afford your monthly payments but still have some of your debt remaining.

It’s important to note that debt settlement can have negative consequences on your credit score. So, before pursuing this option, make sure you understand the risks involved.

You have a chance

The good news for anybody who is hesitant about this choice is that nearly everyone who applies for bankruptcy receives another opportunity.

Bankruptcy cases: There were 544,463 bankruptcy filings in 2020. Chapter 7 was the most popular form with 381,217 bankruptcy filings (70%). Chapter 13 had 154,341 cases (28.3%) and Chapter 11 just 8,113 (1%).

Ed Flynn, of the American Bankruptcy Institute (ABI), found that 94.9% of Chapter 7 bankruptcy filings in his 2020 study were successfully discharged. Only 21,677 Bankruptcy cases of the 442,145 Bankruptcy cases completed in 2020 were dismissed.

Individuals who used Chapter 13 bankruptcy, known as “wage earner’s bankruptcy,” didn’t have nearly as much success. In fact, of the 246,369 Chapter 13 cases completed in 2020, only 43.2% (106,476) were successfully discharged. The majority of cases – 139,893 – were dismissed and thus unsuccessful.