Being in debt can be overwhelming, there are ways out but they can be confusing. Bankruptcy is an option to consider but there are a lot of things to know before you make a decision.
Know the Bankruptcy Basics
Bankruptcy serves two purposes, to allow you relief from debts you cannot pay and to get as much money as possible to the people you owe to mitigate their loss.
Consequences to Bankruptcy
- Your credit report will reflect the bankruptcy for up to ten years.
- It could take time and careful planning to reestablish your credit.
- If you are planning on purchasing a home you may need to wait several years.
- If you choose Chapter 7 you can only dismiss debts once every 6 years.
- Some employers, particularly those who work in financial industries, will check your credit report. A bankruptcy may affect prospective employer’s decisions.
The Steps to Bankruptcy
- Consider hiring an attorney to help sort through the legal paperwork, though not required it may prove a useful navigational tool. The laws governing the paperwork that must be filed in Bankruptcy Court are covered in Title 11 of the U.S. Code which includes amendment S.256, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Bankruptcy Reform Act).
- There are filing fees in addition to any attorney fees you may encounter. As of November 2012 the fee for filing Chapter 7 was $306 and $281 for Chapter 13. It may be possible to apply for the fees to be waived for Chapter 7 but you would have to have an income less than 150% of poverty guidelines.
- You should take the time to investigate the types of bankruptcy to see which is right for you. Chapter 7 and Chapter 13 are the most common for consumers. There are descriptions of each below.
Chapter 7 Bankruptcy
Chapter 7 can discharge your unsecured debts so that you will not need to pay them if you cannot make enough money to cover them. In April of 2005 President George W. Bush in April signed the Bankruptcy Abuse Prevention and Consumer Protection Act, making it more difficult to file the Chapter 7. According to this Act you must attend a government approved credit counseling session within 6 months before filing. You must attend a session from one of the Approved Credit Counseling Agencies. This is one of the two courses you will need to complete, before you are discharged from bankruptcy proceeding you will also need to take a debtor education course.
There is a Means Test you must pass to show you do not have the financial capability to pay your debts. Your income for the previous six months will be compared with the median six month income of your state. If your income is larger than the state median they will consider whether your “disposable” income is enough to pay a minimum of $10,000 over five years’ time you will not be allowed to file Chapter 7.
Chapter 7 does not forgive secured debt such as a car loan or mortgage on your home if it is considered exempt in your state. A bankruptcy lawyer can help you determine what is considered exempt in your state. Anything non-exempt property is usually sold by a court appointed trustee and the profit used to pay your creditors. You would still be responsible for government student loans, taxes, any debt that was created using fraud, child support and alimony.
Chapter 13 Bankruptcy
When considering Chapter 13 you should know that many debt consolidation companies will do very much the same things but without the stigma of a bankruptcy on your credit report. The Wage Earner Plan, as Chapter 13 is known involves a court appointed trustee who will summarize your debts and create a payment plan you can afford, then gets the payment to your creditors. You are eligible if you have a regular source of income and less than $307,675 in unsecured debt and less than $922,975 in secured debt.
You do not get your entire debt forgiven but after 3 to 5 years of completing the court ordered plan most of the debt that remains is discharged. Some debts cannot be let go due to the bankruptcy reform. These are child support, alimony, educational loans, any luxury goods of $500 or more purchased within 3 months before filing, cash advances of $750 or more taken within 70 days of filing, criminal fines, drunk driving damages, or personal injury lawsuit damages, trust fund debt, debt from taxes that were filed fraudulently, late or not at all.
The bankruptcy reform act does however allow Chapter 13 reorganization to include replenishing your retirement savings in an IRA or other plan.
You may only file Chapter 13 every two years or if you have filed Chapter 7 in the past you would have to wait 4 years.