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What is it and how does it work? : INVESTMENT

bankruptcy

Bankruptcy eliminates your debts or creates a payment plan for creditors so you can catch up. Companies, farmers, municipalities and individuals can file for bankruptcy.

While wiping out your debt sounds appealing, bankruptcy is basically ruining your balance. In some cases, however, this may be the best option.

And keep in mind that some debts (especially student loan debt) may not go bankrupt. So make sure you know exactly what you are getting into before starting the process.

What do the numbers / types mean?

There are two types of bankruptcies – Chapter 7 and Chapter 13.

Chapter 7

Chapter 7 bankruptcy is a liquidation of your debt – it wipes out most of your unsecured debt. There will be no repayment to the creditors in the case of repaid claims. Chapter 7 is considered a simple and straightforward process.

The process can take three to four months. Chapter 7 also gives you legal protection. For example, if someone sued you, it basically disappears with other debts. If your home is foreclosed, the foreclosure will stop, giving you time to make an agreement with the lender.

You must to qualify for Chapter 7 through your country’s specific resource review. A qualifying factor is your income. If your household income is $ 85,000, but your state’s average income is $ 65,000, you will not pass the means test and will not qualify for Chapter 7 bankruptcy. In addition to the means test, you have not been able to file Chapter 7 in the past six years to have.

A court decides which of your assets will be sold. You can set exceptions for items such as your car, your home, and your retirement savings. Exceptions are state-specific. Keep in mind that your house can still be sold depending on what you owe and the value of the house. Expect luxury goods such as boats and second homes to be liquidated.

Some debts, such as taxes, maintenance, child support and student loans, cannot be paid.

Chapter 7 remains in your credit report for 10 years. While you can still apply for credit, your prices are likely to be terrible. But everyone’s situation is different. Some people are able to get back to a pretty good credit score within a year and allow them to get auto finance. The cost of filing Chapter 7 is $ 335.

Chapter 13

Chapter 13 is a bankruptcy bankruptcy. It is a repayment plan drawn up by the court with a term of three to five years. Most are five years old. If there are still debts after five years, they will be paid.

Chapter 13 is aimed at people who have an income but need a place with creditors. In other words, they need creditors to lower payments and make up for the debtor.

An advantage of Chapter 13 is that you can keep your home. Any foreclosure that is in progress is stopped in Chapter 13. Unlike in Chapter 7, real estate is not sold.

Credit card / doctor bills can be debited.

To be eligible, you must have regular income and unsecured debt less than $ 394,725, and secured debt less than $ 1,184,200. Tax debts (i.e. property taxes), child benefit and student loans may not be eligible. The cost of filing Chapter 13 is $ 310.

If you miss payments while on the plan, you can lose all of your protection and the benefits of the plan. In this case, you will have to file the entire bankruptcy to be back in the place you were in before filing.

Chapter 13 payments are not made directly to creditors. Instead, the debtor sends payments to a mediator, who then sends the payments to the creditors. There is no contact between the debtor and the creditors during the payment schedule.

Chapter 13 remains in your credit report for five years.

If you choose a bankruptcy attorney for both bankruptcies, the cost can range from a few hundred to a few thousand dollars.

Can it really help?

Yes, provided you have a plan to fix your finances. If you don’t see any light at the end of the tunnel because the debt has been paralyzed, you can start over by clearing your debt. However, if you have no income or have no plan to increase your income or create a budget, bankruptcy may not help.

What about student loans?

Unfortunately, most student loans (99.999%) don’t go away when you file for bankruptcy. The only way to get rid of student loans is in the situation where they inflict excessive hardship on the borrower or his family. Inappropriate hardship is difficult to demonstrate, and only a few bankruptcy applicants actually manage to pay their student loans.

Why? Because federal student loans have a variety of income-based repayment plans that can reduce your monthly payment to $ 0 if your income is low enough.

If you are disabled and unable to work, you can have your loan repaid under disability relief.

Finally, there are many student loan programs.

All in all, it is extremely difficult to prove to a judge that you cannot qualify for anything to make your payments manageable.

The notable exceptions are private student loans, where the likelihood of bankruptcy is much higher.

Final thoughts

Filing for bankruptcy has its positive effects if you have a plan to change the situation and not go back to where you started.

Note that bankruptcies become public knowledge. Employers and co-signers may be notified as soon as you submit the documents. You must answer “yes” to each application when asked if you have ever filed for bankruptcy. It really is an event that will be with you in one form or another for the rest of your life.

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