Do you have multiple credit card payments each month? Are you barely making the minimum monthly payments on each card which is making it difficult just to pay for groceries and transportation? If you have a significant amount of debt and a relatively low income, you may qualify for bankruptcy. If you are one of the many Americans in extreme debt, then you may want to consider filing for bankruptcy to eliminate your debt. You will want to consider the information below before making a final decision.
Bankruptcy can be a relief to many people because it eliminates their debt, but it also comes with negative consequences that can last for years. If you are considering filing for bankruptcy, you should be aware of the requirements and of the negative impact to your lifestyle and your credit score it can cause. This legal proceeding should only be used as a last resort to eliminate your debts. A bankruptcy will have a lasting effect on your credit score and will remain on your credit report for up to a decade.
During a bankruptcy proceeding, after you have filed the extensive amount of paperwork and documents, you will have to go to a court and answer questions about your finances and assets, and you must answer them honestly and provide full disclosure of any and all aspects of your finances.
There are two different types of bankruptcies that are most commonly filed in the United States: Chapter 7 and Chapter 13. If you have business or corporation dealings or have multiple assets, such as multiple buildings, houses or cars, then you may want to consider Chapter 13 bankruptcy.
A Chapter 13 typically will require you to make some payments to repay some of your debt, and it allows you to maintain some of your assets, depending on your specific situation. Business debts are not considered in Chapter 7 bankruptcies – they would be considered under Chapter 13. Chapter 7 is the most common bankruptcy filed for the average American.
Chapter 7 Bankruptcy
Bankruptcy approval depends on your amount of income as compared to your expenses, such as house payments and car loan payments, in addition to credit card and other debts. The court will use what is known as a means test, which allows them to determine if your debts are severe enough to qualify for a bankruptcy hearing. The means test involves your income, amount of debt, and amount of disposable income.
A Chapter 7 bankruptcy will only apply to consumer debts. If your income is less than the median income in your state, then you have a better chance to qualify for a Chapter 7 bankruptcy. If your income is above the state median, you may still file, but you must have enough debt that prevents you from a large amount of disposable income.
Disposable income is the amount of money you have left after paying off necessary monthly expenses such as food and transportation. If you have a significant amount of disposable income, then you should be able to repay your debts on your own, so you most likely will not qualify for a bankruptcy. Other necessary expenses may include rent or mortgage payments, or child care in some cases. You will have to analyze your expenses and determine which qualify to be considered as necessary expenses.
The means test is just one factor the court will consider when reviewing your bankruptcy filing. There are many specific requirements based on the state you live in, so you will need to know the details that apply to you. Many people seek assistance from a bankruptcy lawyer or a credit counselor. A lawyer or credit counselor can help you navigate through the process and ensure you complete all the necessary requirements.
Not all debts can be included in a Chapter 7 bankruptcy. For example, child support or alimony and federal student loans cannot be included. If you own luxury items such as boats or vacation homes, you may have to surrender those assets, but you cannot include those debts in the bankruptcy.
Advantages of Filing for Bankruptcy
One of the great advantages of filing for bankruptcy is the protection of automatic stay, which legally prohibits creditors or collection agencies from contacting you. If you are severely in debt, then you are familiar with calls from these companies. Automatic stays apply to phone calls, lawsuits, wage garnishments, repossession and foreclosure. This in itself can be a great relief to many people who receive harassing phone calls from creditors and collections agencies.
A Chapter 7 bankruptcy will eliminate almost all your unsecured debts, which allows you to have a fresh start and begin rebuilding your credit. During this time, you should be following a budget to ensure you remain debt-free and only use the money in your bank account for purchases and expenses. The only way to live debt-free is to reduce your expenses and eliminate the use of credit cards.
Some creditors will attempt to get you to open a new account immediately after you file for bankruptcy. Why? Because they know you will not be able to file another bankruptcy any time soon, so any credit you use will have to be repaid. Be careful with these offers, because they tend to have extremely high annual percentage rates (APR) since you are considered high-risk. It is essential to manage your expenses wisely until you can rebuild your credit score, although it may take a few years.
Disadvantages of Filing for Bankruptcy
Filing for bankruptcy will cause significant damage to your credit score, and it will remain as a stain on your credit report for at least 7 years and possibly up to 10 years. Of course, if your accounts are already in default or have been passed over to collections agencies, then you may already have a fairly low credit score. The benefit of wiping out all your unsecured debt can outweigh the negative effect on your credit score, but you should consider all the consequences before making a final decision to file for bankruptcy.
A bankruptcy is a matter of public record. In some cases, this could affect your employment, or your ability to get a job. Many employers run credit checks on any applicant, and some occupations may require a good credit score and credit history. In addition, it may be more difficult to get approval for an apartment or a car loan, so this should be carefully considered as well.
You may be required to surrender some or all of your assets if you file for a Chapter 7 bankruptcy. This depends on the type of assets you own and their value. For example, expensive stamp collections or family heirlooms may have to be surrendered. If you have a second vehicle or additional bank accounts, those may have to be given up as well. The lawyer or credit counselor can help you determine what assets you will be required to forfeit.
Counseling and Education Requirements
In addition to analyzing your finances, to file for bankruptcy you will also need to complete pre-bankruptcy credit counseling and post-discharge counseling. The counseling sessions will help you learn to manage your finances responsibly and avoid accumulating significant debt. You will receive a certificate for these sessions which you must present to the court.
Pre-bankruptcy counseling typically includes evaluation of your finances and developing a budget, in addition to explaining alternative options to bankruptcy. This counseling session is usually 60-90 minutes long and it can be done in-person or online. The counseling session is free with a waiver, but it may cost up to $50 depending on the state you live in. You will be notified up-front of any counseling fees.
Post-Filing Debtor Education
Post-bankruptcy counseling or education involves developing a budget, managing money and using credit wisely. This counseling can also be done in-person or online, and it typically takes around 2 hours to complete.
Other Important Information
Filing is Not Free
It is important to understand that you will have to pay some money toward filing for bankruptcy. Even if you choose to opt-out of hiring a lawyer, you will still have to pay filing fees, which can be substantial. You may also file a waiver for the filing fee, but there is no guarantee you will be approved.
Bankruptcy is a Long Process
It could take up to 2 years to completely discharge your bankruptcy. In between then, you will be required to complete multiple forms and documents that are complicated and must be completed accurately. Lying or deceiving the court on any aspect of your finances is considered a federal crime and it is not taken lightly. In fact, you may be investigated by the FBI. You must disclose all your finances and be completely honest with any answer you give regarding your bankruptcy.
Other Options to Consider
There are some alternatives to bankruptcy that you may want to consider before you decide to file. A debt consolidation loan may be another option that can help you eliminate your debt without damaging your credit score as a bankruptcy would.
Debt Consolidation Loans
Debt consolidation loans allow you to pay off your high interest debts with a loan, and repay the loan in one single monthly installment. If you have multiple credit cards with high interest rates, or you have other personal loans or payday loans, you may want to consider a debt consolidation loan, but you must consider your specific financial situation in order to determine if this loan is the best option for you. Using a credit card payoff calculator will help you determine the right choice in this scenario.
A debt consolidation loan should have a lower interest rate than what your other creditors are currently charging you on your other accounts. This can be difficult if you have a low credit score, but there are lenders who will consider applicants with bad or poor credit if their income reflects an ability to repay the loan. If the monthly loan payment is not much less than what you are currently paying to your creditors in total, then you may have difficulty repaying the loan.
To use a debt consolidation loan successfully, you will need to reduce your spending to eliminate the use of credit cards completely. Financial freedom will only be achieved if you stop accumulating debts and begin living on only your income. Not only should you eliminate the use of credit cards, but you may also want to consider increasing your income so you can begin to build a savings or emergency fund. This is the only way you will be able to live a life free of debt.
Know Your Finances
Regardless of if you decide to pursue bankruptcy vs debt consolidation, it is important to know the details of each so you can make the best decision for you and your family. A credit counselor is a great resource to utilize that can help you make an informed decision. It doesn’t feel good to be overwhelmed in debt, but you don’t want to make another financial mistake that will cost you significantly. Understanding your finances is essential to making the best decision to eliminate your debt.
If you are drowning in debt and receiving harassing phone calls from creditors or collections agencies, then a bankruptcy may provide you some relief. You have to be prepared to live on just your income alone without the assistance of credit cards or payday loans or other high-interest options. Although it is a long process and it does have some consequences, a bankruptcy can eliminate all your debts and allow to start over living debt-free. Of course, it will negatively impact your credit score, but if you are severely in debt, chances are your credit score is already damaged.
A court proceeding can be intimidating, but if you are honest and provide all the required information, a bankruptcy can be a life-changing event that improves your quality of life. If you are willing to accept the consequences, this may be a good financial decision.
Financial Advisor, DCL
Dan is one of the top financial experts when it comes to debt consolidation. With more than 20 years of experience helping people tackle debt, he has a unique insight when it comes to solving debt-related problems.
Dan got his start when he went to work for a bank after getting his Business Degree. He worked his way up and became a loan officer. This position gave him unique insights into the ways that financial products work and how people can utilize different financial products to improve their lives. He’s seen hundreds of success stories and just as many failures – so he knows what steps are most likely to help his readers.
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