Are you someone who is looking forward to filing bankruptcy as you have noticed that it is becoming impossible to manage your personal finances? Do you wish to know more about what future pros and cons you may have to face by filing a bankruptcy?
If this is the case, then you have landed on the right article as here you will get to learn about all the things that are related to bankruptcy. So without any further ado, let’s get to dive into it.
Understanding bankruptcy
Before you get influenced by other people and proceed to file for bankruptcy, it is extremely crucial that you understand its core meaning and how it reflects your personal finances in the bank. In simple words, bankruptcy is a legal process that requires input from federal legal courts to essentially eliminate or reduce the price of debt that you or your business has to pay.
Now, although in the majority of cases, bankruptcy will eliminate almost all of your large debt, it is important to keep in mind that there are future consequences that you might have to face.
One of the major and damaging effects bankruptcy has on your financial profile is that it remains on the credit report for more than seven years. This ultimately means that you are no longer able to open new credit cards and even get approved with future loans.
Types of bankruptcy
Now that you have an understanding of what bankruptcy is, let’s take a look at the types of bankruptcy and how much they differ from each other. Although bankruptcy puts you in a place where you might be eligible to open a new financial account, however, you can find some other alternatives like negotiating with creditors and making a payment plan. If you are looking to file for bankruptcy, you should know about the two basic options, chapter 7 and chapter 13.
One thing to keep in mind is that in both types, the main use is of your personal assets and financial accounts, but the way they are handled by federal courts differs.
Chapter 7
When it comes to chapter 7 bankruptcy, you should know that here all your assets are liquefied in order to pay your creditors. However, remember that in this case, not all your assets get liquefied, meaning that things like clothes, personal items, mobile phones, pension, social security, tools of employment, and other public benefits granted to you will not be taken away, and you can keep them.
While these remain to be with you, other non-exempt assets will be sold off to a trusted authority or a figure who will then proceed to give it to the appointed creditor. Now you might be wondering what is included in non-exempt assets? Well, these assets include secondary properties, vehicles, trucks, boats, valuable/ collectible assets both physical and digital, investments, and bank accounts. Chapter 7 bankruptcy is most often used by those people who have low income and own fewer valuables.
Chapter 13 bankruptcy
The second type of bankruptcy is chapter 13, which essentially gives you the right to retain all of your assets, but it comes with a catch. The trustee legally collects your assets and financial accounts and equally distributes them to a creditor, but in order to have full authority over them, you must pay back the debt in a specified period, usually around three to five years.
This form of bankruptcy is usually chosen by those individuals who wish to keep their property/ financial assets and for those who want to buy time before stop foreclosure. Some of the benefits of chapter 13 bankruptcy are that you can save your home from foreclosure, remove any sort of higher mortgage, and, lastly, allow you the option to only pay back only what you could afford.
Terms of bankruptcy
Throughout the process of bankruptcy, you will be met with some legal terms that are essential to know so that you are fully aware. A bankruptcy trustee is essentially a person who has been appointed by a legal federation who will act on behalf of the creditor.
He/she will most likely review the financial assets severity of your case and will also devise a repayment plan if you choose to go for the chapter 13 bankruptcy.
Another term is credit counseling which is extremely crucial before you file for bankruptcy. Why, you may ask? The reason for this is so that you could prepare a plan with non-profit budget companies and credit companies on how your assets/ finance will be handled.
Things to do before filing bankruptcy
Majority of the population out there only go for the option of filing bankruptcy when they see no other alternatives out there for them to use to relieve their financial situation. If you are someone who is looking forward to filing a bankruptcy, it is important that you try to negotiate with your creditor beforehand and prepare a reliable and secure plan to pay back.
In the case of a home mortgage, you could try calling the loan servicer and ask them of available options that they may have depending on your case. You may be surprised to know this, but there are several internal revenue services that operate and are willing to negotiate, given that you have proven your reliability and clear interest.
Workings of mean test
Although you are the main person who will evaluate and settle on whether you want to choose chapter 7 or chapter 13 bankruptcy, there are still some other external inputs that may be required, mainly from the federal court.
Most of the time, the court will issue a mean test to determine how eligible you are for the chapter 7 criteria. In the mean test, your average household income for the past six to seven months will be compared to the median income of your household in the area/ state you reside in. If, after calculation, it is found that your remaining income is less, then the court may refer you to go by the option of chapter 13 bankruptcy.
Medical debts
A large proportion of the population out there owe medical-related money directly to doctors, nurses, laboratories, and other people working in the medical sector. These types of debts are regarded as unsecured debt as they cannot be used as collateral with other physical assets such as property, a house, or a car.
If you have unsecured debts, the only option you would be left with is chapter 13 bankruptcy, where you get a plan and are required to pay it back in a fixed period of time. One thing worth mentioning is that for unsecured debts, you are supposed to pay a certain percentage through the repayment plan, and this percentage depends on how big or small the debt is.
Secured debt
If you are unsure of what secure debt is, it is simply a type of debt that you owe that is backed up by collateral. This allows the lender to fully rely on and have security when giving/ lending out money or any other form of a financial asset.
In this case, the borrower will have a close association with a repayment plan, and in case he/she fails to do so, the bank will automatically seize the collateral, sell it and use it to pay back the lender. Overall though, the interest rate on secured debt is much less than unsecured debt as it is backed up by collateral.
Discharging debts
When the federal court issues a discharge of debts, this essentially means that all your debt has been removed and that you no longer need to move with the repayment plan. This ultimately means that creditors, whom you owe the debt, will no longer have a legal claim against you, and so they would not pursue any legal action against you.
When this occurs, your creditor, lawyer, and other individuals involved in your case will get a notice. If, after the discharge of debt has been issued, any creditor tries to collect a debt, they will ultimately be fined by the authority.
Consequences of bankruptcy
Earlier in the article, we have mentioned that due to bankruptcy, you will no longer be eligible in the future to open any sort of credit card or take loans from finance companies, as this case will be issued in the credit list for several years. However, one of the most damaging consequences of this is the loss of property ownership.
Depending on the severity of your case, you might end up losing not only just your property but also vehicles, antique pieces that hold value, real estate, and any other assets that you may own. Since the bankruptcy file is attached to your credit file, any person/ lender in the future could view it and may hesitate to work with you.
Rebuilding credit
Although the effect of bankruptcy will remain on your profile for several years, it will eventually get removed after the timing period has passed. Your score could also ultimately improve over time if you are successful in proving you can handle credit properly.
One tool that many people use has a secured credit card that you use to make deposits in line with your issuing bank. This creates a new line of credit, and over time if you keep using that card to make payments on time, your credit history will be new, and so in the future, you could once again become a regular holder.
The takeaway
So hopefully, by now, you have a better understanding of what bankruptcy is and how it will affect your debts over time. Although rebuilding a new credit score can be a time taking task, it is not impossible. The adverse side effects of bankruptcy can fade over time, helping you get back on being a regular finance holder.