Bankruptcies are legal actions involving a person or a company that cannot pay their debts when they become due. In federal courts, bankruptcy proceedings are conducted by a bankruptcy judge who assesses a debtor’s assets that might be used to pay off obligations.
There are several advantages of bankruptcy, including:
- Automatic stay: Bankruptcy puts into place what is known as the “automatic stay.” The automatic stay prevents any of your creditors from contacting you to try to collect their money. All forms of contact are included. While you attempt to resolve your financial issues, the automatic stay will protect you from creditors: no more threatening letters or incessant phone calls demanding payment. It will also halt current court cases against you (where someone is trying to collect money from you).
- Prevent foreclosure: An automatic bankruptcy stay may also prevent your home from being foreclosed upon during the bankruptcy.
- Discharging your debts: It is difficult to improve financial health when debts get out of control. Through bankruptcy, you can, however, discharge many types of debt (that is, have them paid off or forgiven), allowing you to start over and make better financial decisions. When you discharge a debt, it is completely erased, and you are no longer responsible for paying it. Some types of debts cannot be discharged (see below). There are, however, many types of debt that can be forgiven, such as credit card debt and medical debt.
- Rebuilding your credit: Initially, your credit score will drop because of the bankruptcy. A bankruptcy record will appear on your credit report for 7-10 years. However, after clearing your debts and starting over financially, you may be able to improve your credit over time. In addition, if you are nearly debt-free after the bankruptcy, you can start paying your bills on time. That will improve your credit score.
What Are the Disadvantages and the Drawbacks of Filing for Bankruptcy?
The following are some points to consider when it comes to bankruptcy:
- When you file for bankruptcy, you will probably lose any credit cards you have.
- A future home mortgage or any other significant line of credit is also unlikely for you.
- Some of your property may be taken by the court and sold to repay your creditors. With the help of a lawyer, most or all of your property can be protected in bankruptcy through bankruptcy exemptions. It is not uncommon for people who file for bankruptcy to keep all their property using bankruptcy exemptions.
- Bankruptcy only applies to your own debts. If you hold any debt with another person (such as a joint credit card), your responsibility to pay off the debt is ended, but the debt continues. All responsibility for the debt will go to your joint debtor.
- Furthermore, liens attached to your property cannot be discharged through bankruptcy. (However, by filing motions with the court with the assistance of an attorney, some liens may be avoided during the bankruptcy process.)
- After filing for bankruptcy, you cannot file again for about six years. If you run up debts again, you will not have the ability to discharge those debts through bankruptcy.
- Many people find bankruptcy embarrassing and have a negative mental reaction to it. Filing for bankruptcy often carries a stigma, negatively impacting your professional and personal life. Some employers run credit checks on people they are considering hiring, and they may reject you for a job when they learn of your bankruptcy.
Some Obligations Are Nondischargeable
Many types of debt can be discharged, but some kinds cannot. Non-dischargeable debts typically fall into one of three categories, including those that are:
- Not discharged, but only if the creditor makes a case that it shouldn’t be
- Not discharged unless the debtor can make a case that it should be
- Always non-dischargeable or never discharged
You can use the following categories to evaluate whether your obligations fall into a group of debts that cannot be discharged:
- Support payments ordered by a court, such as child support and alimony
- Student loans
- Federal, state, and local taxes
- Any money borrowed on a credit card to pay taxes
- Any fines or other fees associated with breaching the law
- Some debts may have special conditions that must be met to be discharged, including debts for injuries sustained in a drunk driving accident, debts from tax-advantaged retirement plans, and debts for condo or cooperative housing fees.
- Also, a general creditor may ask the court to order a debt to be non-dischargeable. The debt will be dismissed if no creditors raise the question of dischargeability or if creditors do, but the court rules against them. Credit card purchases for luxury items, cash advances, and debts acquired through deception or fraud may all fall under this category. In addition, a debtor won’t be able to get rid of a debt brought on by purposefully harming someone or their property.
Even though bankruptcy has many advantages, as stated above, it can also negatively affect your lifestyle and long-term financial situation. Due to the disadvantages, you should think carefully before filing for bankruptcy.
What Are Some Common Bankruptcy Legal Issues?
The most common bankruptcy legal issue is the possibility that your bankruptcy petition is denied. This is quite uncommon, however. It is rare for personal bankruptcy petitions to be denied, but in certain circumstances, they can be.
Your income-to-debt ratio may not meet the statutory requirements. In other words, the court believes that you make enough money to pay off the debt, which you will be required to do.
You may be denied bankruptcy if you lie about how much certain assets are worth or how much income you make during the year. If you conceal financial assets and records, your bankruptcy may be denied. One of the requirements for filing for bankruptcy is being completely honest about your financial situation.
It is also possible for a bankruptcy filing to be denied for technical reasons unrelated to your income or your honesty. A bankruptcy petition may be thrown out if the paperwork is not filed correctly and on time or if other conditions for filing are not met.
To make a bankruptcy petition worthwhile, you should be completely honest about your financial situation and handle (or have your lawyer handle) all technical aspects of the proceedings correctly.
Should I Contact a Bankruptcy Lawyer?
Bankruptcy may or may not be the best solution for your financial problems, depending on your situation, your debts, and how much property you need to protect. An experienced bankruptcy lawyer should be consulted if you are considering bankruptcy.
Most people who file for bankruptcy in the United States do so with the assistance of an attorney, as with other court cases. Bankruptcies come in many different forms, and some rules go along with each. An experienced bankruptcy lawyer can be very helpful.
Finding the right bankruptcy attorney is crucial since bankruptcy is a complex legal claim. If you decide to file, an attorney can ensure that your property is protected, that all your dischargeable debts are discharged, and that your creditors do not violate your rights. By doing so, you will be on the right path to financial recovery.