Should I File for Bankruptcy?
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When Is Filing for Bankruptcy a Good Idea?
Filing for bankruptcy can be a workable option for individuals who need relief from their financial debt. Bankruptcy is a court process that allows an individual to have a fresh financial start. It can relieve much of the stress associated with debts that have accumulated from credit cards, mortgages, car loans, and other types of creditor-debtor arrangements.
Filing for bankruptcy is a major decision that can have long-lasting consequences. As such, becoming familiar with bankruptcy options is vital to making the right decision.
What Types of Bankruptcy Are There?
Unless you will be filing bankruptcy as a business, you will likely be filing under consumer bankruptcy laws. There are two basic types of consumer bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is known as “Liquidation Bankruptcy,” while Chapter 13 is known as “Repayment Plan Bankruptcy”.
Chapter 7: The main feature of Chapter 7 is that the court may allow some or even all of your debts to be “discharged.” This means that you will not be required to pay off the debts. Some debts are non-dischargeable and must be repaid. Debts that cannot be discharged include:
- Student loans
- Money owed to the government.
Some property might be sold in order to pay off some of the debt during a Chapter 7 bankruptcy proceeding. However, there are several categories of exemptions. Property identified as “exempt” may not be repossessed by creditors for the purpose of paying off the debt. Chapter 7 bankruptcy is designed for individuals without steady income and with a large number of exemptions.
Chapter 13: The main feature of Chapter 13 bankruptcy is that the court allows the debtor to reorganize their debts to be paid slowly over a longer period of time. Instead of discharging the debt, the person is given more time to pay back their debt. This type of repayment plan bankruptcy is best for persons who have a steady income stream, are good at sticking with payment plans, and have a lot of non-exempt property.
In both Chapter 7 and 13 bankruptcy, the court will issue an “automatic stay” on collections. This means that debtors are prohibited from collecting on debts while the bankruptcy process is still ongoing. Also, the court will usually appoint a trustee who acts as a mediator between the debtor and the creditors.
What Are the Pros and Cons of Filing Bankruptcy?
Individuals should carefully weigh both the positive and negative aspects of filing for bankruptcy. Some of the pros and cons of filing bankruptcy are:
- Filing for bankruptcy allows for the person to have a fresh start and catch up on back expenses. A new repayment plan can also be a welcome change.
- The “automatic stay” on collections is effective as soon as bankruptcy is filed. This means a debtor can hold a creditor liable if they attempt to make additional collections.
- Some assets may be exempt from repossession, such as a home, car, and other basic necessities
- Usually there is a low threshold or minimal amount required for filing for bankruptcy.
- A person cannot be fired simply for filing bankruptcy
- Filing for bankruptcy will be reflected on a credit history for up to 10 years
- It is possible to lose some or all assets, specifically credit cards and credit lines
- Once an individual files for bankruptcy, they may have to wait for up to six years before filing again
- Even though if someone filed for Chapter 7, a judge has the authority to convert it into a Chapter 13 claim
- Many debts are non-dischargeable
- Bankruptcy proceedings are documented in public court records
What Are Alternatives to Filing Bankruptcy?Before filing for bankruptcy, it would be wise to consider a number of alternative options, such as:
- Negotiating with creditors to adjust your monthly payment amounts
- Working with an outside advising source, such as a debt reduction company or consumer credit counseling service.
- Reassess finances and cut back on spending.
Do I Need a Lawyer to File for Bankruptcy?
Filing bankruptcy is a major project. It involves a complete assessment of your financial capabilities as well as a projection of your future expenses. You should consider hiring a tax attorney or a bankruptcy lawyer if you think that filing bankruptcy might be necessary. They are familiar with all the details of bankruptcy law and can tell what type of bankruptcy might be appropriate for you.
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Last Modified: 12-15-2014 02:53 PM PST
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