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Under Chapter 13, a bankruptcy judge sets up a repayment plan. Under this plan, you pay back some or all of your debts, but at a rate and with monthly payments that you can afford.
Both forms of bankruptcy will usually drop your credit score by 100 points or more. But Chapter 7 bankruptcy stays on your credit report for 10 years, while Chapter 13 falls off after seven.
Lenders will see your bankruptcy filing every time you apply for a credit card, mortgage, car loan, student loan, or any other form of debt. You will struggle to get lenders to approve your applications at least for the first several years after filing for bankruptcy protection and will often have to pay higher interest rates when lenders do decide to loan you money.
When, then, does taking this credit hit make sense?
1. Your Liabilities Are More Than Your Assets
Tayne says that bankruptcy is often the best option when consumers owe so much that their liabilities are far higher than the value of their assets. In such cases, it can be nearly impossible for consumers to catch up with their debts.
“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,” Tayne says. “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.”
2. Negotiations Didn’t Work
Are You Struggling With The Choice To File Bankruptcy
However you got into debt, you may be struggling with the question, Is bankruptcy right for me?
Most of the clients I meet in my Asheville bankruptcy law firm came to the realization that they were trapped with the amount of debt they had and needed help getting relief. They couldnt get out of debt by skipping the morning coffee line.; They couldnt get out of debt from debt snowballs.; Debt avalanches didnt work either. You name it, they tried it. But nearly all of my clients say the same thing, I wish I would have filed bankruptcy sooner.
Bankruptcy Basics: Is Filing Bankruptcy The Right Choice
The word bankruptcy itself creates a frightful notion. Although you may feel burdened by consumer debt, its not too late to put the pieces together and fix whats broken. Also, better ask yourself: Is filing bankruptcy the right choice?
In Canada, numerous debt relief options are made accessible to those individuals who have been tormented by their debt. These options aim to give you a fresh start and better management of your finances. If you qualify and get discharged, you should make it a point to avoid debt and deal strictly with how you strategize your expenses.
On the contrary, you may find the process of bankruptcy as far more devastating as it seems compared to the other debt relief options. Before you take a leap, you might want to consider the other debt relief options available including consumer proposal and debt settlement.
In This Guide…
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A Quick History Of Bankruptcy
The term bankruptcy probably came from the Italian phrase banca rottawhich literally means broken benchbecause in medieval days, if a merchant couldnt pay their creditors, they could come break the merchants market stall .1
What about bankruptcy in America, specifically? Well, several different bankruptcy acts popped up during times of economic crisis before the Bankruptcy Act of 1898. This one said bankruptcy didnt require the creditors approval and stuck around until the Bankruptcy Reform Act of 1978which set the laws we follow today.
Now when you file for bankruptcy, no ones coming to smash your bench , but its still a painful experience.
Bankruptcy Vs Closing Down Your Business
It is smart to have at least a preliminary idea of what you expect a bankruptcy to accomplish for your company. You should have realistic expectations regarding bankruptcy and how it can help your company.
If there is no demand for your product, bankruptcy reorganization won’t help. Bankruptcy can’t make your company profitable, and you can’t expect bankruptcy to cure all of your company’s financial problems.
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Bankruptcy Basics: When Should You File For Bankruptcy
Sometimes, there’s no other option than to file for bankruptcy. But before you do, make sure to assess your situation accurately.
Bankruptcy is a scary proposition. The word “bankruptcy” itself sounds so ominous. The media bombards us with nightmare tales of seemingly solid business giants going from bedrock to bankrupt. Gossip columns never tire of dishing on the latest celebrity inches from bankruptcy. You might even fear that you’re a few steps from going under. But, just how can you tell when it’s time to throw in the towel and declare bankruptcy?
What Is Chapter 13 Bankruptcy
Like Chapter 11 bankruptcy, Chapter 13 involves the creation of an organized repayment plan. Once your plan is approved, your case is turned over to a trustee, who is responsible for ensuring that you make your regularly scheduled payments, usually over a three- to five-year term. Those payments are then distributed to your creditors to pay off the debt included in your bankruptcy.
Many debt counselors advise against Chapter 13 because falling behind on the monthly payments can result in your bankruptcy being dismissed. If that happens, you lose court protection for your debts and will once again owe them in full.
Its also important to note that roughly 70% of Chapter 13 cases end up unsuccessful and in dismissal because the debtors financial circumstances turned dramatically worse during the repayment period.
Keep in mind that Chapter 13 bankruptcies can be converted to Chapter 7 because of unforeseen circumstances such as unemployment or long-term disability.
Like Chapter 11, Chapter 13 will remain on your credit report for about seven years from the time you file.
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The Language Of Bankruptcy
Here are some basic terms that you will need to understand.
Automatic stay. When you file a petition for bankruptcy with the Bankruptcy Court, all collection actions against you automatically stop. Any court judgment handed down before you filed for bankruptcy cannot be enforced against you or your property. This is called an “automatic stay.” Although the 2005 law provides more exceptions to this rule, the automatic stay still prevents most collection efforts while your case is pending, especially if your case is a relatively simple and quick one.;
Discharge. This is what you are seeking when you file for bankruptcy. In the typical case, about four months after your case is filed, your unsecured debts will be forgiven, or discharged. This discharge does not apply to secured debts and does not apply to “non-dischargeable” debts.;
Debtor is a person who owes debts; in a bankruptcy proceeding, you are the debtor.;
are persons or businesses that have loaned you money or who provided goods or services to you on credit.;
Secured creditor is a creditor who has a legal interest, called a ”lien,” in a piece of property. If you default on your loan agreement, that creditor can take steps to repossess or foreclose on the property. Examples: A bank that gives you a home mortgage has a ”secured interest” on your home. Usually, a lender on a car purchase will take a secured interest in the car. ”Home equity” loans are also ”secured loans.”;
Reasons To Consider Filing For Bankruptcy
Surveys agree that job loss and medical debt are the two biggest reasons for considering bankruptcy. Many times, the two team up and light a torch to a familys financial plans.
Health problems can make it difficult or even impossible to do your job. The result is you either quit or are let go by the company. That is a toxic combination because you lose your source of income at precisely the same time expenses go up.
There are some other, less imposing situations that could cause you to consider bankruptcy. You might be headed down that road if:
- You are getting a divorce
- The home you own is under water and in danger of foreclosure
- The only way you can pay for things is using a credit card
- You use one credit card to pay off another
- You are considering withdrawing money from a 401 account to pay bills
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How To Find A Bankruptcy Attorney
You don’t necessarily need to pay an attorney to file for bankruptcy, but it’s generally a good idea to do so, experts say. If you do consult with a lawyer, it’s best to find one who is well-versed in the complex laws of bankruptcy. Many or most lawyers specializing in bankruptcy offer a first consult free, Boltz adds.
You can find bankruptcy lawyers through your state’s bar association or on websites such as the National Association of Consumer Bankruptcy Attorneys. Check out credentials, and don’t be fooled by people who prepare forms and who say they are just as good as a lawyer. “All they are legally allowed to do is type,” Boltz said. “They can’t give you advice.”
If you can’t afford a lawyer, you may qualify for free legal services. Try these resources:
Legal Services CorporationLSC is an independent nonprofit established by Congress in 1974 to provide financial support for civil legal aid to low-income Americans. The Corporation currently provides funding to 134 independent nonprofit legal aid organizations in every state, the District of Columbia, and U.S. Territories. The LSC also helps you find a service near you.
Is Filing Bankruptcy The Right Choice
Youve probably heard the story of Sisyphus from Greek mythology. Sisyphus endured the never-ending task of rolling a giant boulder up a hill just to watch it roll down again where he would have to begin again. For many of us, our debts are just like Sisyphus boulder: a heavy burden that never seems to have any sign of stopping. Bankruptcy is one option to put an end to the debt cycle.
We meet with individuals every day who are asking the same questions as you: Is filing bankruptcy the right choice? It depends on your individual situation, but here are some common circumstances that make bankruptcy the better option for our clients.
1. You are at-risk of losing your home. You are behind on your mortgage payment, and you dont know how you can catch it up. You can make the current payment now, but you cant make up the past-due amount with one lump sum payment.
Once a garnishment has started, other than paying the debt in full, oftentimes there is little you can do to stop the garnishment process. The filing of a bankruptcy petition, in most cases, stops garnishments.
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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.
When To Call A Bankruptcy Attorney
The best time to call an attorney is before youve reached the point of foreclosure or repossession. There is no need to suffer under the weight of overwhelming debt and constant harassment from creditors. So often, individuals wait until their debt is so overwhelming that they are about to lose their home. While;bankruptcy;doesnt wipe the slate clean with your debts, it can help you get your finances back under control so that you and your family can begin to live again. A qualified bankruptcy lawyer will be able to guide you whether you should file Chapter 13 or Chapter 7 and when to file. If you are still employed, one thing to note is that sometimes annual bonuses or commissions can affect an individuals eligibility to file. If you have questions, the bankruptcy team at The Hall ;can help you understand what the best choices for you.
Situations like divorce, loss of income, extensive medical bills each have very distinct aspects that all affect how and when a bankruptcy filing should happen. Speak to a bankruptcy attorney if you are going through any of these and are beginning to feel the weight debt affecting your life.
Who Should I Call?
Do Not Believe the Myths and Misconceptions
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Talk To A Bankruptcy Lawyer
Need professional help? Start here.
Endnote: Bankruptcy Vs Debt Consolidation
Are you deciding whether debt consolidation or bankruptcy is the right choice for you?;
If youre having trouble managing your bills for the first time, a debt consolidation loan should be your first choice.
This is a quick and straightforward solution that will not significantly impact your credit score or force you to make major lifestyle changes. On the other hand, if your credit has already been severely harmed and you have tried a range of different measures to regain control of your debt with little success, bankruptcy may be the most realistic option for you. If you are unsure about the ideal option for you, consider consulting a financial professional. They will help you make the right choices to get out of the debt trap.
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Is Bankruptcy The Right Choice For You Things To Think About
Bankruptcy is stressful, but it can provide financial relief. On one side, you will need to handle a lot of people looking into your personal finances. On the other side, you will no longer receive calls from bill collectors and you can work on your finances. The article below discusses some tips to make bankruptcy less painful.
Before filing for personal bankruptcy, make sure you are doing the right thing. Avail yourself of other options, including consumer credit counseling, if they are appropriate for your situation. Bankruptcy leaves a permanent mark on your credit history, so before you take such a large step, you want to exhaust all other options so that the future effects on your credit history are as minimal as possible.
Discharging Debts In Bankruptcy
A bankruptcy discharge releases a debtor from being personally responsible for certain types of debts. So, after a bankruptcy discharge, the debtor is no longer legally required to pay any debts that are discharged.
The discharge prohibits the creditors of the debtor from collecting on the debts that have been discharged. This means that creditors have to stop all legal action, telephone calls, letters, and other type of contact with the debtor. This prohibition is permanent for the debts that have been discharged by the bankruptcy court.
You cannot discharge all debts in bankruptcy. Some of the most common debts that you cannot get rid of in bankruptcy are debts from child or spousal support, most student loans, most tax debts, wages you owe people who worked for you, damages for personal injury you caused when driving while intoxicated, debts to government agencies for fines or penalties, and more.
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Dealing With Debts Not Covered By Bankruptcy
While bankruptcy will clear many types of debt, there are some that are excluded, including magistrates court fines and student loans. If you owe any debts that are excluded, the people you owe these debts to can continue to chase you and take action to get their money back during your bankruptcy period. You therefore need to make sure you know which debts your bankruptcy won’t cover and work out how you’ll pay them back.
Will Bankruptcy Benefit You
With so many factors involved in the decision-making process, a Yes or No answer isnt possible, but here is a good guideline to use in making a final decision.
If you cant find a way to get out of debt in the next five years and have diligently researched solutions then yes, bankruptcy can benefit you.
But weigh the pros and cons and remember one other thing: You cant go to jail just because you owe someone money.
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