15 Tips: How Bankruptcy Works
15 Tips: How Bankruptcy Works
As is pointed out by the gurus over at runrex.com, when someone decides to file for bankruptcy, it is not a decision they take lightly. However, once you have already made up your mind to file for bankruptcy, you may start wondering how it works. This article, through the following 15 tips, will look to explain how bankruptcy works and we hope it will help you understand the process better.
- Types of bankruptcies
As is explained over at guttulus.com, there are 6 types of bankruptcies: Chapters 7 (liquidation), Chapter 9 (municipalities), Chapter 11 (business reorganization), Chapter 12 (farmers), Chapter 13 (personal reorganization), and Chapter 15 (cross border). Commonly filed bankruptcy cases involve Chapter 7 or Chapter 13 bankruptcy.
- What is Chapter 7?
This type of bankruptcy is often referred to as “liquidation bankruptcy” as it discharges most of your unsecured debt by liquidating your assets. As per the gurus over at runrex.com, it is the simplest, quickest, and most common type of bankruptcy, although you must first qualify to file for Chapter 7, after which the whole process can be completed in 6-8 months.
- What is Chapter 13 bankruptcy?
This type of bankruptcy is often referred to as “reorganization bankruptcy” as it involves offering the judge a payment plan allowing you to pay back creditors in 3 to 5 years, and it doesn’t require the liquidation of property. You must have a regular income to qualify as this is what will enable you to make the required monthly payments. There are also debt limit qualifications to consider for Chapter 13, as discussed over at guttulus.com.
- What is Chapter 11 bankruptcy?
This type of bankruptcy is similar to Chapter 13, as it essentially involves the restructuring or reorganization, but it is typically reserved for businesses. Although it is possible for businesses to file for Chapter 7, this means a liquidation of assets, which is why many prefer to file for Chapter 11 bankruptcy as per the gurus over at runrex.com.
- What is a discharge?
A discharge is a court order that releases you from obligations to pay debts, which means that debt collectors and creditors must stop attempts to collect on the debts. This will put an end to harassing phone calls, or a mailbox full of threatening letters.
- Which debts are discharged in personal bankruptcy and which are not?
As is covered over at guttulus.com, bankruptcy allows you to discharge debts in the following categories: credit cards, auto loans, utility bills, personal loans, mortgages, and medical bills. On the flip side, the following are not discharged in bankruptcy: alimony, student loans, child support, and tax debt, although some IRS debt may be eligible for a payment plan.
- Reaffirming a debt
Another tip worth mentioning on how bankruptcy works, is defining what is meant by reaffirming a debt. As discussed over at runrex.com, this means that you sign, and file with the court a legally enforceable document stating that you promise to repay all or a portion of a debt that may otherwise have been discharged in your bankruptcy case. Reaffirmation agreements are voluntary and aren’t required by the Bankruptcy Code or any other state or federal law.
- Cost of bankruptcy
According to the folks over at guttulus.com, it is also important to highlight the cost of filing for bankruptcy. Here, retaining a bankruptcy attorney could cost you several thousand dollars, while if you decide to go it alone, you will still have to pay filing fees, with the latter option meaning that your chances of success will be significantly reduced. The average cost of Chapter 7 bankruptcy is about $1,250.
- Bankruptcy and your credit report
As is revealed in discussions on the same over at runrex.com, Chapter 7 bankruptcies will remain on your credit report for 10 years, while Chapter 13 bankruptcies will remain on your credit report for 7 years.
- Bankruptcy education
Another tip worth pointing out is that, as part of any bankruptcy filing, one must go through a required educational process. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, consumers must undergo pre-file credit counseling 180 days before filing for bankruptcy, which is designed to provide you with education about the process and alternative debt-relief options. After filing, consumers are required to also complete a pre-discharge course about personal financial management.
- Pros and cons of bankruptcy
If you are wondering whether or not to file for bankruptcies, here are some pros and cons to consider. Pros: it eliminates or reduces debt, allows one to get a “second chance with finances, temporarily prohibits creditors from foreclosing on a home or repossessing a car, and also temporarily prevents wage garnishment or disconnection of utilities as explained over at guttulus.com.
Cons: affects your credit record for up to 10 years, makes it difficult to get a mortgage afterward, becomes a public record that can be viewed by potential employers, banks, and other lenders, as well as insurance companies.
- What is Judgment Proof
From discussions on the same over at runrex.com, Judgment Proof describes a person whose income is too meager to settle debts with a creditor and whose assets are protected from liquidation by federal law. This could be an option for people with a high level of debt but with a low level of income that is protected.
Alternatives to bankruptcy
If you are struggling with unmanageable debt, bankruptcy is just one solution, and there are other options to consider which are covered in the following tips.
- Debt management plan
According to the gurus over at guttulus.com, a debt management plan can provide enough relief to allow you to eliminate credit card debt over 3 to 5 years. Under debt management, credit counselors work with lenders to reduce interest rates, fees, and penalties to an affordable level. In return, you then promise to pay back the full principal over time in a manner that is efficiently managed.
- Debt consolidation loan
Another alternative to bankruptcy is to take out a debt consolidation loan, which can aggregate multiple high-interest, costlier debt into a single, lower-interest loan. This means that with this option, all your debts will be combined into a single manageable bill which will be paid with a single loan that has a reduced interest rate as explained over at runrex.com.
- Debt settlement
Finally, you can also attempt to convince your creditors to accept less than what is owed on their debt, sometimes even as much as 50% less. Given that your creditors don’t want you to default on your debt, they may be willing to work with you to arrange a more achievable repayment plan. However, it is important to note that debt settlement will hurt your credit report.
The above are just some of the things you need to be aware of if you are looking to file for bankruptcy, with there being more insights to be uncovered on this topic by checking out the excellent runrex.com and guttulus.com.