In our last blog, we discussed how you may be faced with the uncomfortable decision of filing for bankruptcy. Let’s continue with some of the most commonly asked questions and perhaps offer more clarity regarding common misconceptions when it comes to this important financial decision.
The emotional blow of bankruptcy is often further complicated by the calculated decision of knowing the right kind of bankruptcy you need to file. If there’s a bright side to this decision, though, before declaring bankruptcy, you’re required to undergo credit counseling. This can provide a useful opportunity to get the guidance you’re after, including which type of bankruptcy, Chapter 7 or Chapter 13 will get you back to eventual financial stability.
Question 1: What are the steps for filing a bankruptcy?
When you are ready to begin bankruptcy proceedings, you, in consultation with your attorney if you have hired one, will need to decide which kind of bankruptcy protection you will be filing for. Bottom line, you must receive budget and credit counseling from an approved credit counseling agency within 180 days before filing. A certificate from the agency showing that you have received this counseling is necessary. Fair warning, though: some agencies are legitimate and some are rip-offs. Even some of the approved agencies may advise that you sign up for a DMP or a Debt Management Plan. For some people a DMP is a good idea, but it may not be right for you. If it means that the monthly payment to them means you cannot afford rent, groceries or prescriptions, then it’s a terrible idea. Remember,
1. Bankruptcy may be the right decision for you.
2. If you sign up for a DMP, you may end up having to file for bankruptcy anyway.
3. There are approved agencies for bankruptcy counseling that do not offer DMP’s.
4. An attorney can give you the legal advice you cannot get from a credit counselor. If bankruptcy is not the right answer for you, the attorney can also give you variety of options. And if it is the correct answer, the attorney can provide a list of approved credit counselors.
Most bankruptcy cases require that the bankruptcy court appoint a trustee. The bankruptcy trustee’s job is to impartially administer the bankruptcy estate, which includes the your assets of the debtor.
Once you file for bankruptcy protection, your assets, such as savings, houses, cars, jewelry, stocks, and bonds, become the bankruptcy estate, and the bankruptcy estate becomes a distinct legal entity separate from you, the debtor.
Question 2: What are the different types of bankruptcies?
Chapter 11, known as “reorganization” is commonly filed by companies and a few individuals saddled with very large debts. Chapter 12 is reserved for family farmers and fishermen.
Chapter 13 bankruptcies formulate a repayment plan with your creditors while Chapter 7 bankruptcies allow you to repay your debts through a liquidation of your assets.
Chapter 7 is also known as “Straight Bankruptcy”. If you don’t have much in the way of income or assets, it is much easier (and more advantageous) to file Chapter 7 since the majority of your debt will be wiped out, although property which is not exempt will be sold and the money distributed to creditors. With that said, people who have significant assets to protect will want to file for Chapter 13 to avoid being forced to sell those assets. Annually, approximately twice as many people file Chapter 7 as Chapter 13
Question 3: Can I keep my car and my home if I file bankruptcy?
As long as your equity in the property is fully exempt, you will not lose your car or your home. Even if your property is not fully exempt, you will be able to keep that property provided you pay its non-exempt value to creditors in chapter 13.
Question 4: What happens after bankruptcy?
It’s true. There is life after bankruptcy and it can be enormously rewarding. The key is preparation and follow-through. Strategize properly and commit yourself to not wasting the second chance you have been given. Ultimately, how well you rebound from a bankruptcy filing depends on the post-bankruptcy steps you take to safeguard yourself against future financial missteps. Even if you have never started or stuck to a budget in the past, the time to get serious about doing so is when you climb out on the other side of bankruptcy.
Another key strategy to rebuilding your credit rating after bankruptcy is to obtain a secured credit card. With a secured card, you deposit a given amount of money, such as $500, into a bank account and that $500 becomes your credit limit. By charging small amounts each month and repaying your debts as agreed, you can gradually rebuild your credit.
Roughly six months after a bankruptcy is discharged, it’s not uncommon for you to see your credit score on the rise.
Keep in mind, though, that everyone’s situation is different. Speak to an attorney and find out your particular options.
– The Litigation Team
Ethan | Mark