On This Page:
–The Term “Bankruptcy”
—Chapters 7, 11 and 13
—-Hiring a Bankruptcy Attorney ␣␣
—–How Bankruptcy Affects Your Credit Report
This page is written as an overview of the workings of bankruptcy and discusses the pros and cons of filing. If you are at the point where you’ve already been sued and you’re facing wage garnishment or the seizure of your assets, contact a bankruptcy attorney immediately.
If for some reason you don’t qualify to file, an attorney might be able to provide you with some valuable references or advice regarding options to handle your existing judgments.
Bankruptcy The Term “Bankruptcy”
There are many stories about how the term Bankruptcy came to be coined. Some say that it has latin origins whereas others believe it to be French.
Whatever the true origins, today bankruptcy simply does not have the stigma it once did. Our attitudes, as well as our bankruptcy laws, have changed dramatically regarding bankruptcy and the rights of those who file.
This section as listing several connected articles and pages will speak of the various requirements as well as the laws governing bankruptcy today. We will also speak of matters like what happens to your credit, assets and financial future when you file for bankruptcy. Are their options to bankruptcy? When do you need to file for bankruptcy and what matters need looking in to before you do.
Chapters 7, 11 and 13 of Bankruptcy Filing
Bankruptcy matters are placed under federal jurisdiction by the United States Constitution (specifically Article 1, Section 8). And bankruptcy cases are always filed in United States Bankruptcy Court. But, bankruptcy cases in many jurisdictions are affected by individual state guidelines, such as the definition of what constitutes exempt property (assets that don’t have to be forfeited). Therefore, the rules regarding bankruptcy cannot be generalized across America; you must look to your state’s laws as well.
The Pros and Cons of Filing
Six types of bankruptcy exist under the Federal Bankruptcy Code. For the purposes of this page, three of them will be mentioned – but only the most popular two used by the average consumer will be discussed at length. The legal categories of bankruptcies are identified as numbered chapters, according to how they are listed in the code.
The Differences Between the Bankruptcy Chapters: Chapter 7
You will have to choose between filing for a Chapter 7 and a Chapter 13 Bankruptcy. A Chapter 7 bankruptcy is also known as a “liquidation” and can be used by individuals or businesses. A trustee is assigned by the court to “administer” the debtor’s estate by selling non-exempt assets (those that are not legally protected) over a minimum amount and use the proceeds to satisfy creditor claims based on a priority schedule. The net proceeds from the sale of assets are divided up pro rata among the creditors, and the remaining debt is forgiven. If the debtor has no unprotected assets, which is often the situation, the bankruptcy is often referred to as a “no asset” case. Once an account is discharged, creditors are forever barred from trying to collect the debt again. You can’t include alimony, child support, student loans, taxes and debt incurred to pay taxes in a Chapter 7 bankruptcy.
Note: It has become more difficult to file for Chapter 7 bankruptcy since the implementation of the new rules under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Two of the main purposes behind this act are to (a) prevent folks from going bankrupt if they make too much money and are likely not budgeting it properly (often having too much credit card debt and/or fast-cash-type of personal loans); and to (b) remind consumers that there are other ways to deal with their debt that they may not have already thought of – namely, avoiding bankruptcy with consumer credit counseling (again, because most of the time a person’s financial turmoil is caused by the overuse of credit cards).
Bankruptcy Chapter 11
Chapter 11 is a form of bankruptcy that can be categorized as a “rehabilitation.” This chapter of the code is primarily used by corporations and businesses in order to be afforded time to reorganize their situation and eventually repay their creditors. Sometimes, individuals use this chapter if they have substantial debts and assets. To qualify, the secured debts must total more than $922,000 and the unsecured debts more than $307,000.
Chapter 13 is a form of rehabilitation for individuals who want to keep their assets and who have a regular source of income, because you will be entering into a court-ordered repayment plan that lasts between three and five years, and is based on several factors, including how you fit into a consumer financial index provided by the IRS. If, at anytime, you fail to comply with the court-ordered repayment plan, you risk losing the right to protect your assets under a Chapter 13 bankruptcy.
If you cannot qualify for approval under Chapter 7, you may be able to qualify under Chapter 13. The benefit here is that you can usually keep your assets, including vehicles and, in some instances, your home. However, again, you must devote a portion of your future income to repay creditors (and usually for between three and five years depending on the amount of disposable income available). Sometimes, a Chapter 13 plan may not require the repayment of general unsecured debt, such as credit cards or medical bills.
Bankruptcy attorneys may not appreciate this, but if you are on the fence about whether to file, you don’t have to rush the issue, at least at first. You can file for bankruptcy at the eleventh hour (the last minute) if you need to. Of course, there’s a chance you’ll be looking at higher attorneys’ fees to accomplish a priority filing, but it can be done.
The first step to filing bankruptcy is to hire an attorney – one who concentrates in bankruptcy filings. The best way to find an attorney is through personal references, which is not easy when you’re not advertising to your friends that you are contemplating bankruptcy. Other sources include your county or state bar association.
Even before you decide to meet with an attorney, prepare a list of all your creditors and accounts, and make copies of your last statements and collection letters. Your attorney may require more physical documentation from you, but this should get you started. And, while this may seem obvious, you should set aside some money to cover your legal fees (not just for your attorney, but also for your court filing fees). Even though an attorney usually prefers to discuss his or her fees in person, you should at least ask ahead of time for a ballpark figure.
How Bankruptcy Affects Your Credit Report
After your bankruptcy case is finalized, your credit file should eventually be updated to report the bankruptcy outcome as one of the following…
The Three Possible Outcomes of Bankruptcy:
Discharged
This is what unsecured creditors don’t want to hear. A “discharge” is a court order finalizing the bankruptcy – forgiving all debts in a Chapter 7 and rescheduling those in a Chapter 13. Since debts for alimony, child support, student loans and taxes are not forgiven, they may still be pursued by collecting authorities. A discharged bankruptcy can remain on your credit report for up to 10 years.
Bankruptcy Dismissed
This is when the court dismisses your case because you did not qualify for bankruptcy protection. In this instance, you remain responsible for the debts you tried to include and can be subject to the collection efforts of your creditors. And if that isn’t bad enough, a dismissed bankruptcy can stay on your report for up to seven years (similar to your revolving or contract debts).
Withdrawn
Plain and simple – you changed your mind and no longer want to file for bankruptcy protection. The problem is that even though you changed your mind, the filing still occurred, so this remark will continue to stay on your credit report for seven years instead of the maximum 10 years allowed for discharged bankruptcies.
If you do decide that bankruptcy is the best option for you, keep in mind that a bankruptcy can affect your credit score by as much as 200 points, and its last reported status can stay on your report for seven to ten years. Fortunately, like any other adverse information, the more time that goes by, the less it will actually affect your score. And as far as future credit goes, don’t worry, you’ll start receiving all kinds of credit offers in the mail before you know it (they may not initially be the most favorable ones, but they’ll eventually be there as well).