Bankruptcy is a legal process designed to help individuals and businesses escape overwhelming debt that they are unable to pay. Bankruptcy can make a person’s creditors stop calling or otherwise harass the person. It can eliminate a person’s debts. For average working people, there are two types of bankruptcy, Chapter 7 and Chapter 13. These are named for the chapters of the Bankruptcy Code that govern these two types of bankruptcy:
- Chapter 7 Bankruptcy – in Chapter 7 bankruptcy, so-called “liquidation” or “straight” bankruptcy, certain kinds of debts are discharged or liquidated. This means that the debt is eliminated and the person who owes the debt does not have to pay it. Most people with personal debts file bankruptcy under Chapter 7 of the Bankruptcy Code.
- Chapter 13 Bankruptcy – in Chapter 13 bankruptcy, so-called “reorganization” bankruptcy, a person sets up a repayment plan to resolve their debts. The person may still pay their debts, or part of them, but on a schedule to which the person agrees. The repayment plan is one that the person can manage.
People consider filing for bankruptcy when payment of their bills becomes impossible to manage with their income. For example, a person may have a car payment, plus payments on car insurance, student loans, high credit card balances, medical bills not covered by insurance, and more. A person may realize that their income just is not enough to pay for rent, food, utilities, and the bills as well. This is when a person may wonder if they can escape the obligation to pay certain debts in bankruptcy court.
There are advantages and disadvantages to bankruptcy. There are advantages and disadvantages to the two different kinds of bankruptcy as well. In any event, it is important to keep certain things in mind when thinking about bankruptcy..
What To Do During Bankruptcy
A person considering bankruptcy should take some steps to prepare for it. A few of those things are as follows:
- Gather together financial documents – A person thinking of filing for bankruptcy wants to gather together their financial documents. Such documents as statements of earnings, debt payments, and balances owed on credit cards and other debts are needed. It is also important to document assets or what you own, e.g. a house, car, and valuable personal property. Having these documents ready will help move the process along.
- Prioritize payments – Some expenses should not be paid, while others are essential.. For example, if a person has a job, keeping that job is a priority. If the person needs a vehicle to get to work and back, they should make payments on their vehicle so as not to lose it. Cable TV service is less important and the payment for that can be skipped. However, it is worth noting that some property, such as a vehicle or a home, may be exempt from loss in bankruptcy. A lawyer can advise you as to which debts are a priority and which are less important and can go unpaid.
- Remain insured – Insurance can be costly, but hospital bills or an accident lawsuit can be more costly. Keeping auto and health insurance paid up should be a priority.
- Tell the truth – It may seem obvious, but lying may qualify as a crime in bankruptcy court. Telling the truth during a bankruptcy is critically important.
What Not To Do During Bankruptcy
A person considering bankruptcy needs to know what steps to avoid. This is why it is a good idea to get a bankruptcy lawyer to help from the beginning. A bankruptcy lawyer can advise a person what not to do before even beginning the formal bankruptcy process. Among other things, a person should not do are the following:
- Take on more debt – Spending more with a credit card or getting a payday loan may seem like a quick solution, but it can cause delays when filing for bankruptcy;
- Fail to mention assets – When an asset is not listed in bankruptcy court documents, it will not remain hidden from the court. On the contrary, the debtor may lose possession of the asset unnecessarily. Mentioning an asset does not always mean it will be surrendered. Report all assets honestly and accurately. Assets include vehicles, real property, and several kinds of personal property, e.g., valuable jewelry;
- Pay more than $600 on a debt – Paying more than $600 on one of the debts you owe will qualify that debt as a preference. Preferences are not allowed. If a person does this before filing for bankruptcy, other debtors can sue to retrieve the money paid on the debt. Again, get the advice of a bankruptcy lawyer before deciding to pay back one debt when there are many to be paid. The bankruptcy court ensures that all of a person’s creditors are treated equally;
- Lie – Again, always tell the truth.
What Factors Disqualify Me From Filing Bankruptcy?
There are restrictions on who can file for bankruptcy, so a person should make sure they qualify before attempting to file. A person may not file for Chapter 7 bankruptcy if the following apply:
- Previous discharge of debt – The person has obtained a Chapter 7 discharge of their debts within the last 6 years;
- Previous application dismissed – The person had an application for Chapter 7 dismissed within the 180 days prior to the current filing;
- Defrauding of creditors – The person has defrauded creditors by such acts as submitting fraudulent information to creditors or concealing assets from them;
- Submission of fraudulent information to the bankruptcy court – The person has submitted fraudulent information to the bankruptcy court;
- “Red flag” activities – The person has engaged in certain “red flag” activities that suggest abuse of the bankruptcy system.
These restrictions were imposed through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 in order to prevent people from abusing bankruptcy privileges.
How Can Bankruptcy Affect Me?
There are downsides to filing for bankruptcy. It lowers a person’s credit score and makes it more difficult for the person to get new credit. For example, it might make it harder for the person to get a mortgage loan to buy a house. Or, it might make it more difficult for the person to rent an apartment; landlords may not want to rent to a person who has declared bankruptcy.
Potential employers may learn about a person’s bankruptcy and it may affect their hiring decision. A potential employer may choose not to employ a person because of a bankruptcy.
Filing for bankruptcy can affect other areas of life. For instance, a bankruptcy filing can affect child support and alimony payments. Basically, bankruptcy cannot eliminate the obligation to pay child support or alimony, but it can set up a better payment plan for the person who owes these payments.
A person considering a bankruptcy filing should weigh the pros and cons before making this move.
Should I Hire a Lawyer to Help Me with Bankruptcy Proceedings?
A bankruptcy lawyer can explain both the positive and negative effects of bankruptcy. Bankruptcy law is complex and technical. Hiring a lawyer is the most important thing a person facing bankruptcy can do. Going through bankruptcy can be highly stressful; it is reassuring to have the help of a knowledgeable lawyer who knows your rights.
If you are thinking of filing for bankruptcy, consult a bankruptcy lawyer immediately. A bankruptcy lawyer can advise you on how to handle your debt even before filing for bankruptcy. They can help you set up a plan to manage your debt while holding on to essential property, such as your home or your vehicle. A bankruptcy lawyer can also tell you which kind of bankruptcy might work best for you.
An experienced bankruptcy lawyer knows how to navigate the court process and prepare technical legal documents. You definitely want a bankruptcy lawyer on your side in a bankruptcy proceeding.