Bankruptcy: How It Works Types & Consequences
Bankruptcy is a legal process overseen by federal bankruptcy courts. It’s designed to help individuals and businesses eliminate all or part of their debt or to help them repay a portion of what they owe.
Bankruptcy may help you get relief from your debt, but it’s important to understand that declaring bankruptcy has a serious, long-term effect on your credit. Bankruptcy will remain on your credit report for 7-10 years, affecting your ability to open credit card accounts and get approved for loans with favorable rates.
Small Business Bankruptcy For A Sole Proprietorships And Partnerships
You also need to understand that if your business is a sole proprietorship or a partnership , filing for small business bankruptcy is essentially filing for personal bankruptcy. This is because there is no legal separation between the business and its owner.
This is a fact that you will certainly want to keep in mind. You will need to seriously consider your personal financial situation and use this information to figure out if it makes financial sense for you to file for bankruptcy due to the financial circumstance of a sole proprietorship or partnership. A Licensed Insolvency Trustee can speak with you on this situation and provide you with the information that you need to make this decision.
If you run a small proprietorship or partnership, since your small business bankruptcy is essentially a personal bankruptcy, your credit score will likely be affected by the bankruptcy.
What Not To Do Before Filing Bankruptcy
If you are considering bankruptcy, there are certain things you should not do before filing.
- Dont max out your credit cards and lines of credit or take on new debt just before filing.
- Do not sell or transfer any assets to someone else with the intent to hide them from your creditors.
- Dont omit creditors from your creditors list thinking you can keep that debt or pay them separately.
- Dont make a preferential payment to or pay off any single creditor at the expense of your other creditors.
- Dont hide information about a potential future inheritance, bonus, or windfall.
- Dont forget to tell your trustee if you have filed a bankruptcy or consumer proposal before.
Activities like this will affect the advice you are given by the trustee, at best, and if viewed as fraudulent, could jeopardize your bankruptcy discharge. Your trustee is required to ask a series of general questions to review past transactions like these, so avoid these reviewable actions and be honest with your trustee in your disclosure.
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What Happens To Debt Collection After I File For Bankruptcy
Once you file for bankruptcy, most but not all debt collection must stop. This is called an automatic stay. Filing for bankruptcy stops repossessions, utility cutoffs, debt collection lawsuits, garnishments, levies, attachments, foreclosures, and evictions where a judgment of possession has not been entered, and most other actions to collect debts. However, filing for bankruptcy does not stop an eviction where a judgment of possession has been entered, or an eviction based on illegal drug use or danger to property.
If a prior bankruptcy was filed and dismissed within the prior year, the automatic stay lasts only 30 days. For the automatic stay to last longer, you must show the court that you filed your second bankruptcy in good faith.
There is no automatic stay if two prior bankruptcies were filed and dismissed within the prior year. To get the automatic stay, you must show the court that you filed your third bankruptcy in good faith. In any bankruptcy, a creditor may ask the court to end the automatic stay and get permission to resume debt collection.
What Happens When You Go Bankrupt
If the adjudicator makes you bankrupt:
- youll receive a copy of the bankruptcy order and may be interviewed about your situation
- your assets can be used to pay your debts
- youll have to follow the bankruptcy restrictions
- your name and details will be published in the Individual Insolvency Register
You can apply to have your address removed from the Individual Insolvency Register if publishing it will put you at risk of violence. This will not affect your bankruptcy.
After 12 months youre usually released from your bankruptcy restrictions and debts. Assets that were part of your estate during the bankruptcy period can still be used to pay your debts.
You might be able to cancel your bankruptcy before youre discharged.
Bankruptcy only applies to individuals. Find out what your options are if your limited company cannot pay its creditors.
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How Long Bankruptcy Lasts On Your Credit Report
The fact that you filed for bankruptcy will remain on your credit report while you are in bankruptcy and for six years from the date your bankruptcy is completed.
If you have been bankrupt more than once, then it may be reported for up to 14 years from the date of your discharge, depending on the timing of your previous bankruptcies.
Eliminating Tax Debts In Bankruptcy
The filing of a bankruptcy, whether chapter 7 or chapter 13 bankruptcy, provides powerful help via two steps: the automatic stay that goes into effect when your case is filed, followed by the discharge injunction that permanently prevents creditors from attempting to enforce or collect a debt against a debtor. For many people, the financial fresh start that comes with filing for bankruptcy is life-changing. This is doubly powerful when it comes to tax debt, since the power of the IRS is far reaching, and tax debts may impact your ability to receive any tax return refunds.
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In A Chapter 7 What Happens To Property I Cant Protect From My Creditors
In a Chapter 7, property you cant protect from your creditors is sold and the money is used to pay your creditors. If property you own free and clear is worth more than you can protect from your creditors, you should probably not file a Chapter 7. If you have property you cant protect from your creditors, you may want to think about filing a Chapter 13. If you think you have more than $25,000 in property for an individual or $50,000 for a married couple, you should consult counsel prior to filing bankruptcy to see if there are additional exemptions which may protect the rest of your property.
What Happens To Your Credit When You File For Bankruptcy
Your payment history is the most important factor in determining your credit score, and filing bankruptcy means that you won’t be paying covered debts in full as you initially agreed.
As a result, filing bankruptcy can have a severely negative impact on your credit score. A Chapter 7 bankruptcy will remain on your credit reports and affect your credit scores for 10 years from the filing date a Chapter 13 bankruptcy will affect your credit reports and scores for seven years.
Regardless of which type of bankruptcy you choose, lenders will be able to see it on your credit reports in the public records section and it’s likely to be a factor in their decision-making. Once you’ve completed the legal process, it will show that both the bankruptcy and the debts included in it have been discharged.
If you apply for credit, lenders may not approve your application unless the bankruptcy has been discharged. Even then, you may have a hard time getting approved for certain types of loans. If you do get approved, you may face steep interest rates and other unfavorable terms.
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Tax Debt: Bankruptcy And The Automatic Stay
While the IRS generally have greater enforcement powers than a normal creditor, such as a credit card issuer, that enforcement power is reduced under bankruptcy law. Fortunately, the IRS, like any other creditor, is subject to the automatic stay that goes into effect at the beginning of a bankruptcy case, as well as the discharge injunction that goes into effect at the end of a bankruptcy filing.
Immediately upon filing your voluntary petition, you experience bankruptcy relief, as the automatic stay acts to prohibit enforcement or collection activity, regardless of the types of debts, whether credit card debt or federal income taxes. Generally, if creditors want to proceed to trying to enforce or collect a debt, they will file a motion for relief from stay in the court to get a court order giving them permission to proceed with enforcement of the debt.
Very importantly, the automatic stay applies to your property as well. Thus, if you are dealing with a wage garnishment from a creditor or a bank account was frozen, a bankruptcy filer will see that activity stop almost immediately after the bankruptcy petition is filed.
How Often Can I File A Bankruptcy
There are longer waiting periods to file another bankruptcy.
- If you get a Chapter 7 discharge, you must wait eight years from the date of filing the first Chapter 7 before you can get another Chapter 7 discharge.
- If you get a Chapter 7 discharge, you must wait four years from the date of filing that Chapter 7 before you can get a discharge under a Chapter 13.
- If you get a Chapter 13 discharge, you must wait six years from the date of filing that Chapter 13 before you can get a Chapter 7 discharge.
- This waiting period does not apply if:
- You actually paid 70% to 100% of the unsecured debts under the Chapter 13 plan, and
- The court finds your plan was propose in good faith, and
- Your attempt to make payments under the plan was your best effort.
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What You Can Expect From Your Initial Free Consultation With A Trustee
If you want to learn more about how filing for a bankruptcy would affect you, and whether there are other alternatives that are available to you, booking a free personal consultation with a local Licensed Insolvency Trustee is an easy next step.
The Trustee will discuss your personal situation with you, answer your questions, and advise you on whether a bankruptcy is the right solution in your case, or if a different insolvency solution an alternative to bankruptcy might be more suitable for you.
The consultation is confidential, and also risk-free as you have no obligation to continue to work with the same Trustee in the future, nor can the Trustee make any decisions on your behalf. You will leave the Trustees office with lightened emotional load, knowing you have gotten trusted professional advice.
Find a local trustee you can trust. We have trustees from coast to coast in Canada including Toronto and Ottawa. Talk to one today!
Which Debts Can I Eliminate By Filing For Bankruptcy
Filing for bankruptcy allows you to eliminate all of your unsecured debts, including credit cards, lines of credit, bank loans, payday loans and income tax debts. Student loans can only be eliminated in bankruptcy if youve been out of school for more than seven years. If you have been out of school for less than seven years you may still be able to eliminate student loans under certain hardship conditionsyour local LIT can review those conditions with you.
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How Do Bankruptcies Affect A Joint Mortgage
If one person files for bankruptcy, that can have an impact if you both are on the mortgage. There are instances where one persons bankruptcy can cause issues with keeping the home, even if more than one of you is on the mortgage. In order to be fully apprised of what can happen, talk to your attorney.
Wipe Out Secured Debt
If you can’t afford a payment that you secured with collateralsuch as a mortgage or car loanyou can wipe out the debt in bankruptcy. But you won’t be able to keep the house, car, computer, or other item securing payment of the loan. When you voluntarily agree to secure debt with property, you must pay what you owe or give the property back .
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Understand What Bankruptcy Means
Unexpected or lengthy illnesses, sudden or prolonged unemployment, and many other factors beyond your control can plunge you into debt that you might struggle to recover from. Insurmountable debt can make it impossible to meet your daily needs and can also lead to persistent pressure and anxiety.
When that happens, you can file for one of many chapters of bankruptcy, which will allow you to greatly decrease or completely dismiss overwhelming debt. Bankruptcy protection is a federal process and cannot be filed or tried in a state court. Federal bankruptcy laws will allow you to begin the credit and finance journey over with a new start.
In addition to removing debt for consumers and businesses, bankruptcy also provides some measure of protection for creditors who might still recover a portion of the debt they are owed through restructured or reorganized debt payments. Your lawyer can help you choose the right bankruptcy chapter and filing to fit your specific financial needs.
For a legal consultation with a lawyer serving Rutherfordton, call
Talk To A Financial Coach
You dont have to walk this alone. Read that again: You dont have to walk this alone. Get with a financial coach and talk about your situation. They arent here to judgetheyre here to help.
A financial coach can help you figure out a personalized plan of action for your specific situation. And yes, talking about money can be terrifying, but if you declare bankruptcy, your financial privacy will be out the window immediately. Opening up to a trustworthy financial coach now can help you avoid having to open up to a whole courtroom of people in bankruptcy.
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Why So Many 55+ People Are Going Bankrupt And How To Bounce Back
Next Avenue Contributor
Getty
The number of people 55 and older filing bankruptcies has skyrocketed since 1991, and thats even more true for those 65 and older.
Bankruptcy can offer a fresh start if youve fallen on tough times and are unable to pay your bills. Once you file bankruptcy, youre no longer responsible for the debts that are discharged. But this fresh start comes with a price: your credit will be negatively affected for years.
According to a paper by Robert Lawless, a law professor at the University of Illinois, and three colleagues:
- The percentage of Americans declaring bankruptcy age 55 to 64 has risen 66% from 1991 to 2016
- The percentage declaring bankruptcy age 65 to 74 increased 204% from 1991 to 2016
- Roughly 12% of bankruptcy filers are now 65 and older, up from about 2% in 1991
Bankruptcy Is A Powerful Tool For Debtors But Some Kinds Of Debts Can’t Be Wiped Out In Bankruptcy
By Cara O’Neill, Attorney
If you’re facing severe debt problems, filing for bankruptcy can be a powerful remedy. It stops most collection actions, including telephone calls, wage garnishments, and lawsuits . It also eliminates many types of debt, including credit card balances, medical bills, personal loans, and more.
But it doesn’t stop all creditors, and it doesn’t wipe out all obligations. For instance, you’ll still have to pay your student loans and arrearages for child support, alimony, and most tax debts. Read on to learn more about:
- what you can expect in both Chapter 7 and Chapter 13
- the benefits offered by Chapter 13 alone, and
- things that can’t be accomplished by filing for bankruptcy.
If you’d like step-by-step guidance through the bankruptcy process, read What You Need to Know to File for Bankruptcy in 2021.
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How Long Do I Have To Wait After Chapter 13 To Get A New Mortgage
Rocket Mortgage and other lenders may give you the option of getting an FHA or VA loan as long as the Chapter 13 bankruptcy is discharged or dismissed before you apply.
If you’re looking to apply for a conventional loan, it matters whether your bankruptcy was discharged or dismissed. In the event of a Chapter 13 discharge, the discharge date has to be more than 2 years prior to the date credit is pulled and more than 4 years since the filing.
If the bankruptcy was dismissed, theres a 4-year waiting period until credit can be pulled for a new conventional mortgage.
Finally, jumbo loans still have a 7-year waiting period before you can apply.
Chapter 7 Bankruptcy And Your Tax Refundwhen A Person Files For Chapter 7 Bankruptcy Generally A Tax Refund Becomes Part Of The Persons Bankruptcy Estate Along With All The Persons Assets It Is Highly Likely You Will Be Questioned About Your Tax Refund By The Trustee During Your Creditors Meeting The Tax Refund Can Be Used To Pay Unsecured Creditors
Because you can keep any assets you receive after filing bankruptcy, a tax refund can be complicated. Often times, people apply for a tax refund before filing for bankruptcy but do not receive it until after they have filed the bankruptcy petition. The trustee will determine how to treat the tax return depending on when the income was earned that determined the tax refund.
Tax YearTax Refund
IF the tax refund was or should have been received the year before bankruptcyIf the tax refund was not spent, it will be considered part of the bankruptcy estate, like other cash held by the debtor. The trustee typically will consider this tax refund the debtors money, because it is normally viewed as money unnecessarily paid to the federal or state government. This means it is treated just like other cash or money kept in the debtors bank account and used to pay unsecured creditors.
IF the tax refund was or should have been received the year of bankruptcyThe tax refund is prorated based on money earned before and after filing for bankruptcy. This means that the part of the refund attributed to income earned before the bankruptcy filing date will be considered as part of the bankruptcy estate. In other words, it will be considered as funds the trustee can use to pay unsecured creditors, just like cash or money in a bank account. However, the part of the refund attributed to income earned after the bankruptcy filing date can be kept by the debtor .
Approved expenses include:
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