You’ve always been told that bankruptcy is a bad thing, and that it can take years to recover. But a lot of times, bankruptcy can be just what you need for financial recovery.
When is Bankruptcy a Good Thing?
While it’s true that filing for Chapter 13 or Chapter 7 bankruptcy has its downfall – it will lower your credit score by 100 points or more and thus directly impact your ability to qualify for new credit cards, a mortgage loan, auto loan, or personal loan for a few years after you file – but that doesn’t mean that you should avoid it at all costs.
“We look at bankruptcy as a last resort,” said Leslie Tayne, a debt-relief attorney. “But sometimes I do advise people to file for bankruptcy. When paying off debt would leave you with no money left over to put food on the table, if it means you can’t pay your mortgage, if there is nothing left over, that’s catastrophic, and then it makes sense to file for bankruptcy.”
Here are some instances when filing for bankruptcy protection might make the most sense, and actually regain your financial standing.
Chapter 13 and Chapter 7
Before you even decide to file, you’ll need to determine which type of bankruptcy protection will work the best for you.
There are two main types of consumer bankruptcy protection: Chapter 13 and Chapter 7.
Chapter 13 bankruptcy is designed to allow you to keep all of your property, but is also determined by your property. The amount of your nonexempt property affects how much unsecured creditors get paid during your bankruptcy process. And to avoid foreclosure or repossession, you still need to keep up with the payments you make for you secured debt, such as mortgages or car loans.
When you file a Chapter 7 bankruptcy, almost all of your assets and property are liquidated and thus become property of the bankruptcy estate that is sold to allow you to repay your debts. There are some exceptions to this though.
During your Chapter 7 bankruptcy, a bankruptcy trustee is appointed and given the authority to sell your assets so that you are able to pay your creditors. Just because your assets are being sold, that does not mean that all of your property needs to be sold.
Differences in Chapter 7 and 13 Bankruptcy
In Chapter 13 bankruptcy, a trustee will not sell your nonexempt assets and distribute the proceeds to your creditors. That’s how it works in Chapter 7 bankruptcy. Rather, you will need to put together a repayment plan that shows your creditors how you plan to pay back some or all of your creditors. You get to keep your property in exchange for paying back a certain amount of the debt you owe. But remember that the more nonexempt assets you have, the more you will need to pay to unsecured creditors.
When you file for Chapter 7 bankruptcy, a trustee takes the nonexempt property, sells it, and uses the proceeds to pay your general unsecured creditors. But because you keep all of your property with Chapter 13, it’s unfair to your unsecured creditors if they do not get paid as much as they would have had you filed for Chapter 7.
Because of this, if you file Chapter 13 and create a repayment plan, you will still need to pay the general unsecured creditors a dividend at least equal to the value of your nonexempt assets. So if you have a large amount of nonexempt property, you hay have to repay the unsecured debts in full.
Both Chapter 13 and Chapter 7 bankruptcy will drop your credit score – usually by 100 points or more. In terms of “staying power,” Chapter 7 bankruptcy stays on your credit report for 10 years and Chapter 13 falls off after seven years.
The fact that the bankruptcy is on your credit report will impact you every time you apply for a new line of credit from lenders, including credit cards, a mortgage, a car loan, a student loan, or any other form of credit. It can be difficult for lenders to approve your applications because of the bankruptcy because it shows that you have had issues with repayment in the past. Additionally, you might also face paying higher interest rates if a lender does decide to loan you money.
While this can be daunting, there are some reasons why bankruptcy is still a good option.
When Bankruptcy Can Help
Liabilities Are More Than Assets
Tayne advises on filing bankruptcy when consumers owe so much that their liabilities are far higher than the value of their assets. Why? Because in these cases, it can be impossible for a consumer to actually catch up to their debt.
“If income is far less than expenses, if there is no end in sight even if I help them cut their expenses, then bankruptcy might be the only option,” says Tayne. “If their income will never let them meet the requirements to pay even the minimal amount of what they owe each month? Then bankruptcy might be their only choice.”
Negotiations Don’t Work
It’s always advised that before you decided to file for bankruptcy, that you try to work things our with your creditors. Creditors are often inclined to help out consumers as long as consumers are active in doing so. Many creditors are able to reduce the amount of money owed if you are able to prove you are struggling financially. You might need to provide copies of your most recent paycheck stubs and bank statements, or anything that will prove that your income has fallen or that your savings are depleted to your creditors before they are able to offer assistance.
This is the first step you should take in trying to deal with debt.
But if your creditors are not willing to negotiate, the only option you may have is to file for bankruptcy protection. After you file, your bankruptcy trustee will be responsible for negotiating with the people you owe. A lot of times, these professional negotiators are more able to convince creditors to forgive at least some of your debt.
A Job Loss or Serious Illness
Job loss or serious illness can be devastating – and not just emotionally, but also financially.
Bills and debt tend to pile up quickly during these times, which can make it impossible to generate the monthly income you were once used to.
If job loss, medical emergency, or other financial disaster has made it impossible for you to come up with a monthly income, and there is no way that you will be able to recover in a quick amount of time, then bankruptcy can provide the relief you might need to help you recover from these financial setbacks.
Working with a Bankruptcy Attorney
When you decide to file bankruptcy, you should also consider working with an attorney. They will advise you on the following:
- the type of bankruptcy you should file
- how bankruptcy can help you
- what to expect during the process, and
- any potential difficulties they see with your case
Additionally, you should be able to address any questions or concerns you might have.
The Bankruptcy Process
Filing for bankruptcy requires you to fill out a packet of forms. Your bankruptcy attorney will have specialized software that helps to guide you through the process and also ensures that everything is prepared for the court. You will be required to provide information about your income, expenses, assets, and debts. Working with an attorney will ensure that the information on these forms is filled out accurately, and filed correctly.
You will need to attend a meeting of creditors after you file for bankruptcy. Depending on your specific filing, you might need to attend additional hearings. Your lawyer will advise you on if you need to be in attendance, or if they are able to represent you without you needing to be there, as sometimes you will not be required to be in attendance.
At all times your lawyer will help you to understand the process, as well as ensure that the court has all the information it needs to obtain from you, in addition to any forms.
Working with a Bankruptcy Attorney
Bankruptcy law can be hard to understand. Because of this, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have. There can be a lot of questions during this extremely stressful time. Let the lawyers at RHM LAW LLP walk you through the process so you can achieve the best outcome possible.