If you are falling behind financially, you may be wondering if bankruptcy could offer you a way out of debt. It might, but bankruptcy isn’t right for everyone. Before you decide to file, talk to a bankruptcy attorney who can help you weigh the pros and cons of filing for bankruptcy.
Deciding to file bankruptcy is tough. The financial, emotional, and practical considerations should be weighed to decide if it is worth it. Even though it offers a powerful tool to get out of debt, it is worth considering the downside of filing for bankruptcy before you commit.
The automatic stay that happens in every case is often one of the biggest benefits of filing for bankruptcy. This stay puts a halt to collections by creditors. They must stop calling, emailing, and sending letters. Foreclosure, garnishment, and repossession proceedings are put on hold for as long as the bankruptcy is pending.
The initial filing may set you back, but once the petition has been filed you can start rebuilding your credit right away. Bankruptcy petitioners are eligible for a mortgage loan as soon as 2 years after discharge. Car loans can be started as soon as the discharge is entered. Whether you are making payments under a Chapter 13 bankruptcy payment plan, or managing new debt after a Chapter 7 bankruptcy, many people see their credit scores improve after filing their petition.
The fact that you filed for bankruptcy will show up on your credit report for 10 years from the date of discharge. When you file your petition, your credit score will take a hit of 160 to 200 points. However, most bankruptcy petitioners already suffer from bad credit going in. The discharge of past-due debts will also clean up your credit history, making it easier to bounce back once the bankruptcy is over.
Bankruptcy is great to get relief from unsecured consumer debts, like credit cards, medical bills, or unpaid rent and utilities. But other kinds of debt are not dischargeable. If most of what you owe comes from child support, recent tax debts, student loans, or other nondischargeable debts, bankruptcy may not have the impact you were expecting on your monthly budget.
The different types of bankruptcy proceedings also have pros and cons of their own. Even after you decide to file for bankruptcy, you and your bankruptcy attorney will need to decide whether Chapter 7 or Chapter 13 is right for you.
Completing a Chapter 7 bankruptcy is mostly about honestly and completely completing the paperwork and disclosing your assets. You will be required to attend a creditor meeting with the bankruptcy trustee and a complete personal financial management course after you file. However as long as you meet all the requirements before and after filing, receiving a Chapter 7 discharge is almost automatic.
The trade off for the discharge of debts is that bankruptcy petitions have to pay off everything they can. That includes selling any non-exempt assets. If you have a lot of equity in your house or have been saving up for your kid’s college, that money will likely go to your creditors to satisfy your debts.
While a Chapter 7 bankruptcy won’t let you protect your nest egg, it also isn’t necessarily going to put you out on the street. Exemptions can protect your home (up to a certain value of equity), vehicle, and personal items. In fact, most Chapter 7 bankruptcies are “no asset” cases, where all the family’s belongings are protected from creditors.
A Chapter 7 bankruptcy is a snapshot in time. It freezes your financial situation, uses your assets to pay your creditors what you can and discharges the rest. But sometimes, debt problems are caused by habits that aren’t discharged along with the debt. Even the mandatory personal financial management course may not be enough to keep you and your family from making the same mistakes again in the future.
Unlike a Chapter 7 bankruptcy, a Chapter 13 payment plan is designed to protect all your assets, even a valuable home or vehicle. Because the payment plan is based on your debts and your current income, it doesn’t require the same sale of non-exempt assets as a Chapter 7.
Getting your debt discharged in a Chapter 13 bankruptcy depends on successful completion of your payment plan. But a lot can happen in the 3 to 5 years. Losing a job or having an accident can make it difficult or even impossible to keep your promises and make your payments. Your bankruptcy attorney can file a petition to modify or extend the plan for undue hardship, but there is no guarantee this petition will be granted, so you may end up converting to a Chapter 7 Bankruptcy anyway.
Preparing and maintaining a Chapter 13 payment plan is a hands-on crash course in prudent financial management. If you are able to successfully complete your payment plan, you will have broken any bad financial habits and learned strategies to handle the everyday emergencies that may arise, making future debt trouble less likely.
The average Chapter 7 bankruptcy takes a few months. A Chapter 13 bankruptcy will take 3 to 5 years. During that time, you promise not to take on additional debt over $2,000.00 without court approval. This includes everything from a new car loan to co-signing student loans with your children. While you can usually get the court to approve a new car purchase if you need it, if you anticipate needing to make a big purchase with financing, filing for bankruptcy may not be worth it.
Filing for bankruptcy isn’t always the best choice to resolve your debt issues. At John A. Steinberger & Associates, P.C., we won’t force you into bankruptcy if it isn’t right for you. We are a full-service bankruptcy law firm in Southeast MI, serving debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We carefully evaluate our clients' circumstances, and discuss which strategies will be best for them, whether or not they include bankruptcy. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.