Planning for bankruptcy
Several financial signs can indicate that an individual may need to file for bankruptcy in the near future, such as:
- Making the minimum payments on their credit cards while carrying one or more outstanding balances
- Missing credit card or other loan payments
- Being rejected for a loan or credit card
- Being unable to purchase health insurance
- Failing to maintain an emergency fund
Filers who have experienced two or more of these financial events should start learning more about bankruptcy.
There are a few things bankruptcy filers must take care of before they formally file. People thinking about bankruptcy should start gathering essential documents about two weeks prior to filing. Important documents include a list of assets and liabilities, a list of the names and addresses of creditors, bank statements, paystubs, child support and alimony orders, vehicle titles and mortgage and lease documentation.
Those planning to file for either Chapter 13 or Chapter 7 bankruptcy must also complete credit counseling in the 180 days before they file. Credit counseling is required by bankruptcy code and usually costs $50, lasts about 90 minutes and can be done in person, over the phone or online.
Determining eligibility for Chapter 13 or Chapter 7 bankruptcy
After hiring a lawyer, gathering documents and completing credit counseling, filers will need to establish their eligibility for either Chapter 13 or Chapter 7 bankruptcy.
Chapter 13 bankruptcy, also known as a wage earner’s plan, allows filers with limited debts to develop a repayment plan with creditors. The plan lasts for three to five years, after which eligible remaining debts are discharged. To be eligible for Chapter 13 bankruptcy, filers must have unsecured debt, including credit card debt, under $360,475 and secured debt, like a mortgage or car loan, under $1,081,400. Those filing for Chapter 13 bankruptcy must also pass a means test.
Chapter 7 bankruptcy liquidates a filer’s debts and is meant to give him or her a financial fresh start. When debts are discharged under Chapter 7, the filer has no obligation to repay creditors. However, those eligible for Chapter 7 may sometimes have to part with some personal property.
Life after bankruptcy: what to expect
Fortunately, rebuilding financial stability after bankruptcy can begin in as little as six months, depending on which type of bankruptcy for which a filer is eligible. Chapter 7 filers may be able to apply for a secured credit card within six months, the point at which their debts have been discharged. At 18 months, a Chapter 7 filer may be able to apply for an unsecured credit card. Between 18 and 24 months, Chapter 7 and Chapter 13 filers can apply for a mortgage.
The next milestone is three years from bankruptcy, at which point Chapter 13 filers may begin to have their remaining debts discharged. At this point, they may be able to apply for a secured card. Between seven and ten years after filing, bankruptcies may be erased from both Chapter 7 and Chapter 13 filers’ credit reports.
Filing for bankruptcy makes an impact on a filer’s life for years after debts have been repaid or discharged, but the freedom bankruptcy gives to those burdened by debt can make the process worthwhile. If you are considering bankruptcy, please contact an experienced bankruptcy lawyer.