Bankruptcy Questions and Concerns[yoast-breadcrumb]
Bankruptcy Questions and Concerns
Filing for bankruptcy can be a confusing, stressful process. You probably have a lot of questions about how bankruptcy works and what it means for your financial future. This article will try to answer some of the most common bankruptcy questions and address some of the top concerns that people have when considering bankruptcy.
What is bankruptcy?
Bankruptcy is a legal process that provides debt relief to people who can no longer pay their bills. It allows you to eliminate or repay some of your debts under the protection of the bankruptcy court. There are a few different types of bankruptcy filings:
- Chapter 7 bankruptcy – This is known as “liquidation” bankruptcy. It wipes out many of your unsecured debts like credit cards, medical bills, personal loans, etc. You may have to give up some assets to pay back creditors.
- Chapter 13 bankruptcy – This is known as “reorganization” bankruptcy. It allows you to keep assets like your home or car while repaying some debts over 3-5 years. You have to have a regular income to qualify.
- Chapter 11 bankruptcy – This allows businesses to reorganize debts while continuing to operate.
Bankruptcy gives you a fresh start by eliminating debt, stopping collections calls and lawsuits, and letting you rebuild your credit over time. But it also has downsides like damaged credit and giving up property, so it’s not right for everyone.
Should I file for bankruptcy?
There are a few signs that it may be time to consider bankruptcy:
- You can’t pay your monthly bills and basic living expenses
- Bill collectors are calling constantly or suing you
- Your wages are being garnished or bank account levied
- You’ve had a major financial setback like job loss, divorce or medical bills
- You have a lot of credit card or other unsecured debt
- You’ve tried debt management plans or consolidating loans but it hasn’t helped
Bankruptcy offers a chance to wipe the slate clean when you just have too much debt compared to your income. But it’s not right for everyone – talk to a bankruptcy attorney to discuss your specific situation.
What types of debt can bankruptcy eliminate?
Bankruptcy can eliminate:
- Credit card debt
- Medical bills
- Personal loans
- Past-due utility bills
- Most judgments against you
These are called unsecured debts – the lender doesn’t have collateral. Bankruptcy usually can’t eliminate secured debt like mortgages or car loans where the lender can seize the home/car if you don’t pay.
Will bankruptcy hurt my credit score?
Yes, bankruptcy will negatively impact your credit score. Filing for bankruptcy can drop your credit score by 100-200 points initially. It will make it very difficult to get approved for new credit like loans or credit cards.
However, the impact lessens over time. Your credit score can start to recover and improve after about 12-18 months if you responsibly manage lines of credit. Get secured cards, pay bills on time, and keep balances low. After 7-10 years the bankruptcy will fall off your credit report and the impact will be minimal.
Will I lose all my stuff if I file bankruptcy?
You aren’t required to give up all your possessions when filing bankruptcy. Each state has exemption laws that allow you to protect certain assets like:
- Home equity up to a certain amount
- Vehicles up to a certain value
- Retirement accounts
- Life insurance policies
- Clothing and household furnishings
The court can liquidate non-exempt assets to pay back creditors. But bankruptcy exemptions are generous enough that most people don’t lose valuable property.
Can I keep my house if I file bankruptcy?
In many cases, yes – you can often keep your home in bankruptcy if you stay current on mortgage payments. Here are some key points:
- Bankruptcy can eliminate second mortgages or home equity loans if you have enough home equity.
- You can cure a past-due mortgage and keep the house through a Chapter 13 repayment plan.
- The court can’t take houses that have no equity beyond exemptions.
- Your mortgage lender can’t foreclose while you’re in bankruptcy.
Talk to your attorney to make sure your home is protected. You may have to become current on payments first.
Can I keep my car if I file bankruptcy?
In most cases you can keep your car in bankruptcy if you stay current on payments. Things to know:
- The court can’t take your car if you have equity below your state exemption amount.
- You may have to catch up on past-due payments through a Chapter 13 plan.
- The lender can’t repossess your car while bankruptcy case is pending.
- You may be able to reduce your interest rate or payments through the bankruptcy plan.
If you have a lot of equity in the car, the trustee may sell it to pay creditors. But there are options like taking out a loan to pay down the equity.
How much does it cost to file bankruptcy?
The cost of bankruptcy varies by state. The bankruptcy court filing fee is $338 for Chapter 7 and $313 for Chapter 13. Attorney fees average $1,500-$3,000 or more depending on complexity of case. Many attorneys offer payment plans.
While bankruptcy has costs upfront, it may actually save you money in the long run by stopping penalties and high-interest charges. Weigh the costs vs how much debt could be discharged.
How do I find a good bankruptcy lawyer?
Look for an attorney who is experienced in bankruptcy law, not just a general practitioner. Tell them your whole financial situation – they can give legal options. Signs of a good bankruptcy lawyer:
- Certified as a bankruptcy law specialist
- Member of National Association of Consumer Bankruptcy Attorneys
- No disciplinary actions against them
- Responsive to your questions
- Explains bankruptcy clearly
Avoid attorneys who make unrealistic promises or push a bankruptcy filing before reviewing your case. Meet for a consultation before deciding.
What debts can’t be discharged in bankruptcy?
Some debts can’t be wiped out through bankruptcy:
- Federal/state taxes and tax liens
- Student loans (usually)
- Alimony and child support
- Fines and penalties owed to government
- Mortgages and car loans
- Fraudulently incurred debts
Also debts from damage/injury you’ve caused, like DUI claims, can’t be discharged. Talk to an attorney about your specific debts.
How long does bankruptcy stay on your credit report?
A completed Chapter 7 bankruptcy will stay on your credit report for 10 years from the filing date. A completed Chapter 13 will remain for 7 years. The bankruptcy will make getting credit difficult at first.
But credit scores can start to recover after about 12-24 months of responsible credit management following the discharge. Get secured cards and pay on time to rebuild credit.
How often can you file bankruptcy?
You can’t file for bankruptcy again for 8 years after a Chapter 7 discharge or 6 years after a Chapter 13 discharge. The waiting periods provide protection against repeat filings. There are exceptions if you can prove extreme hardship.
It’s meant to prevent abuse of the system. Bankruptcy generally can’t discharge debts from your previous bankruptcy. Carefully consider timing if you may need to file again.
What are the pros of filing bankruptcy?
Benefits of filing bankruptcy include:
- Eliminating most unsecured debts like credit cards or medical bills
- Stopping wage garnishment and account levies
- Halting debt collection lawsuits against you
- Lowering monthly payments through Chapter 13 plan
- Catching up on past-due mortgage or car payments
- Keeping valuable assets like your home
Bankruptcy gives you a fresh start financially and legally. It’s a chance to rebuild your credit and get back on your feet.
What are the cons of filing bankruptcy?
Disadvantages of bankruptcy include:
- Hurt credit score, making credit hard to get temporarily
- Bankruptcy records are public – anyone can search and see you filed
- May have to give up valuable non-exempt property
- Court trustee reviews your finances thoroughly
- Possibility of being audited and having to provide lots of documentation
- May still owe some debts like student loans and tax debt
Bankruptcy also has emotional impacts – feelings of shame or failure. Make sure the pros outweigh the cons for your situation.
What happens after I file bankruptcy?
The bankruptcy process involves:
- Filing bankruptcy petition and forms
- Attending meeting of creditors where trustee asks financial questions
- Waiting period for creditors to object if desired
- Making payments to trustee during Chapter 13 plan
- Attending court hearing for plan confirmation
- Receiving discharge order eliminating debts
- Rebuilding credit responsibly
A Chapter 7 case can be completed in 4-6 months. Chapter 13 takes 3-5 years to complete the repayment plan. Get guidance from an attorney.
Will my employer find out I filed bankruptcy?
In most cases employers do not automatically find out about a bankruptcy filing. Bankruptcies are public records but employers rarely search records unprompted.
However, your employer may find out by seeing changed credit reports or receiving a notice from the court. It’s best to be upfront if bankruptcy could impact your job duties.
Can I still have a bank account if I file bankruptcy?
Yes, you can still have a bank account while in bankruptcy. The account funds may be temporarily frozen when you first file. But you can usually keep at least one checking and savings account.
Your accounts will be protected from garnishment during the bankruptcy. Just be sure to disclose accounts to the court as required.
Should I close credit card accounts before filing bankruptcy?
It’s generally recommended to close credit card accounts before filing bankruptcy. This prevents incurring new charges that may not be discharged. Stop using cards about 3-4 months pre-filing.
You don’t have to formally close the accounts. Just cut up cards and stop charging. Any balances will be included in the bankruptcy. Closing accounts helps prevent temptation to take on new debt.
Can I get a mortgage after bankruptcy?
You can get approved for a home mortgage after bankruptcy, but it will be more challenging at first. Here are some tips:
- Wait 12-24 months after bankruptcy discharge to apply
- Get a secured credit card to start rebuilding credit
- Save up larger down payment since you’ll have higher interest rates
- Ask lenders if they have special programs for borrowers rebuilding credit
- Work on improving other credit factors like income and debt-to-income ratio
- Consider FHA loans which are more lenient toward bankruptcy borrowers
- Ask your bankruptcy attorney for a letter explaining the circumstances
- Don’t apply for too much credit at once – space out new accounts
- Explain any special circumstances to lenders if applicable
Getting approved won’t be quick or easy, but with time and perseverance you can rebuild your credit after bankruptcy. Pay all bills on time, keep credit card balances low, and live within your means. Shop around for a lender willing to work with your unique situation. A strong credit history after bankruptcy can help you qualify for the best rates.