Filing for bankruptcy isn’t the end of your world, contrary to what many believe. You may get the fresh start that you’ve been searching for. The bankruptcy laws were created to give people a second chance and not to punish them.
However, this doesn’t mean that you should file bankruptcy as soon as you feel financially distressed. Declaring bankruptcy can have both short-term and long-term effects and should be considered only as an option. When should you file bankruptcy?
Evaluate your situation before you file
When is it appropriate to file for bankruptcy? This is the question that most people in financial distress will ask. Before you go this route, it is a good idea to consider other options. These options include:
- Credit counseling
- Negotiating your debt with your creditor or making a payment plan
- A budget must be adhered to
However, if you don’t have any other options, bankruptcy might be an option to make a fresh start.
What is Bankruptcy?
Bankruptcy allows you to discharge some of your debts because you are unable repay them. Two ways can bankruptcy be declared are:
- Bankruptcy is filed
- Creditors ask for you to be declared bankrupt by the court
- There are two types of bankruptcy: Chapter 7 or Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as “straight bankruptcy”, or “liquidation”, allows the debtor sell non-exempt assets in order to pay off their debts. After that, the debtor is free from any dischargeable debts.
To be eligible for Chapter 7 bankruptcy, you will need to meet certain eligibility requirements. You might not be eligible for Chapter 7 if you are:
If your income is too high, this is determined by the “means test”: In these cases, you may file a chapter 13 bankruptcy case
- You can repay your debt
- In the last 180 days, you have dismissed a bankruptcy case
- If you have previously filed for bankruptcy, the deadline to file another case is not expired
- You tried to defraud creditors
- com has a wealth of information on Chapter 7 bankruptcy, including how it works.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy will require you to create a repayment plan for creditors that covers three to five years. If your income is higher than the Chapter 7 bankruptcy limit, this method can be used.
Before you can file Chapter 13, you must also show that you meet the eligibility requirements. These are:
- You are not a company.
- Credit counseling was offered to you
- In the last 180 days, you have not dismissed a Chapter 13 matter
- You have not filed for Chapter 13 in the last two years
- Findlaw’s Chapter 13 bankruptcy section provides details on whether you are eligible for Chapter 13 bankruptcy.
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- Before you file for bankruptcy, here are some things to know
- There are some things you need to consider before you declare bankruptcy. These are:
- Not all debts will be discharged
It is important to know that bankruptcy will not erase all of your debts. You will not be able to discharge certain debts:
- Student loans
- Support for children
- Penalties or fines from the court
- You can get rid of credit card debts, loans and lease obligations as well as medical bills.
Bankruptcy can affect your credit score
Filing bankruptcy is a way to show everyone that you are a credit risk. It may prove difficult to get a loan, mortgage or credit card after filing bankruptcy.
Noting that bankruptcy filed under Chapter 7 is permanent, it will be on your credit report for 10 years. Chapter 13 bankruptcy filings will remain on your credit reports for seven years. It is then erased.
Co-signers may be required to pay your debts
If you are unable or unwilling to pay your debt, co-signers will agree to help pay it. Even if you are successful in your Chapter 7 bankruptcy filings, creditors can pursue the co-signer.
Your creditors are not allowed to pursue your cosigner under Chapter 13. As long as you continue to make your regular payments according your agreement, your creditors cannot go after you.
Filing for bankruptcy during a pandemic
Filing bankruptcy for bankruptcy in the midst of a national emergency or pandemic can be difficult as courts’ hours may change. Before you file, ensure that your local bankruptcy court is available and accepting cases. Also, expect delays in processing your case.
The Federal Government may intervene
In rare cases, laws passed by the federal government could have an impact on your bankruptcy case in the event of a pandemic. In response to the COVID-19 pandemic, the federal government passed a stimulant bill.
This stimulus bill made several changes to the bankruptcy code that were temporary. These changes include:
The debt limit for filing bankruptcy under the Small Business Reorganization Act was previously $2,725,625. The debt limit was raised to $7.5million for a one-year period under the stimulus bill.
The definition of income for Chapter 7 and Chapter 13 bankruptcy filers was also modified by the bill. In other words, payments from the federal government related to COVID-19 do not count as income.
Federal student loan holders can defer their payments without penalty for six months up to September 30, 2020.
If they are already under a Chapter 13 or a repayment plan, people can request modifications. Modifications include a seven-year extension of payments.