Struggling to keep your head above water, debt is starting to feel like it’s a weight, holding you down. Sometimes, the best option is bankruptcy. After finalizing one, your credit slate has a brand-new beginning. However, there are a few things you should know before making a decision.
1. Bankruptcy Stays on Your Credit Report for 7 Years
More than anything, you have to consider the time involved in bankruptcy proceedings. Not only does filing one of them take a while, but it stays around even longer. Once you’ve declared bankruptcy, it stays there for 7 years after the filing date.
For many, that’s less time than it would take to repay their debts. So, it’s still a no-brainer, despite the lengthy consequences. But, not everyone has such a clear-cut situation when going into bankruptcy procedures.
Consider what you’d like to do over the next few years, and think about the potential impacts. They’re not always limiting. For example, the FHA allows mortgages to be given to people 2 years after filing. But, it will make getting more credit difficult in many situations.
2. What’s the Difference Between Chapter 7 and 13 Bankruptcies?
Assuming there’s nothing else to do, bankruptcy might be the best choice. There are two types of bankruptcy procedures generally used in the United States. If you’re filing as an individual, they would be chapter 7 and 13 bankruptcies.
The biggest difference is what happens to debt once proceedings are finalized. In a chapter 7 filing, the debt disappears, never to be seen again. Chapter 13 doesn’t completely eliminate debt, even though it lessens the burden. You still have to make regular payments until repaying a pre-agreed upon sum.
Most of the time, chapter 13 still reduces how much has to be repaid overall. So, it’s worth considering if you’ve felt overwhelmed by monthly payments.
3. Consider Potential Bankruptcy Alternatives
Declaring bankruptcy isn’t something you should do without considering all the available options. So, spend a little time speaking to someone experienced in debt consultations. They’ll develop strategies to see how feasible doing it yourself would be.
Sometimes, consolidation is a possibility as well. By consolidating debt into a single loan, it’s possible to reduce monthly payments. Also, many have seen reductions to their repayment totals following debt consolidation.
4. Bankruptcy Filing Requirements
Even if you’re swamped by bills, bankruptcy may not be an option. Everyone has to go through the same process when filing, and it’s not short. It’s usually at least a few months of court, speaking to lawyers, and other headaches.
You’ll have to attend a counseling session before submitting an application for bankruptcy. Be careful while picking one, as it must be approved by the DOJ’s Trustee Program.
Fortunately, there’s no fee if someone doesn’t have the money to pay. So, don’t be afraid to ask about counseling if your budget has seen better days. Even if you don’t qualify for a free session, they’re only $50.
5. How Are the Courts Involved?
After completing mandatory counseling, speak to your attorney to move forward with filing. They’ll discuss which type would be the most suitable for your circumstances. Then, it’s time to make a decision and start the court process.
If you’ve decided to file for chapter 13, there’s a means test administered by the court. They’ll take a look at how much you’ve earned on average over the last 6 months. Only people earning less than the median wage qualify for chapter 13.
When your income exceeds the median, it’s not all over. There are a few deductions available you can use to reduce your qualifying income. If it’s still above the median after deductions, chapter 13 is the only option.
Filing for bankruptcy might sound like a scary, intimidating process meant to discourage. But, that’s far from what we’ve found in reality. Most people see a massive improvement in their quality of life after filing for one of them. So, despite all the commotion, there are plenty of upsides. It’s something worth thinking about when debt feels suffocating.
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