If you are in financial trouble due to large unpaid medical bills, significant debts that you can't repay or you are faced with a foreclosure, then filing for bankruptcy might be the right step to make in order to start anew. You should, however, keep in mind that this is not a simple process or a miracle solution to all your financial troubles. You need to assess your situation realistically, decide whether you should file for Chapter 7 or Chapter 13 bankruptcy, find a reliable bankruptcy attorney and also consider some alternatives such as taking a second or a third job, applying for a peer-to-peer financing, etc.
Types of Bankruptcy
There are overall six types of bankruptcy but three are the most common ones. Businesses declare Chapter 11 bankruptcy, while individuals use mainly Chapter 7 or Chapter 13 depending on their circumstances.
- Chapter 7 Bankruptcy is the option that many Americans choose when they are faced with the impossibility to repay their debt. In order to qualify for that, however, an individual should meet certain requirements – average income and assets less than $45,000 in equity in your home. When filing for bankruptcy you are required to submit a means test form, which is used by the court to check if indeed your income is low enough for Chapter 7 Bankruptcy. After you file, the collectors will be immediately notified and will stop contacting you and in about 7-10 days they will also receive a notification when the hearing will be held.
This is usually within 4-6 weeks after filing. A trustee that is appointed by the court can sell some of your property and repay your lenders and even if the debt is partially covered it is considered discharged. There is some property, which is not subject to liquidation such as your clothing, your car or the tools for your work but the exemption varies from state to state, so you need to double check that with your attorney. The Chapter 7 Bankruptcy will stay in your credit history for 10 years and if you need to file for it again, then at least 8 years should have passed from the first case.
- Chapter 13 Bankruptcy is mainly used if you want to avoid foreclosure on your home. Under this scheme your debt is not discharged but the court approves a repayment plan for covering it. The period to cover all or part of your debts is between three to five years. The Chapter 13 Bankruptcy will remain on your credit record for seven years.
- Other types of bankruptcy – the other types of bankruptcy are Chapter 9 – used by municipalities to resolve their debts, Chapter 11 – rehabilitation or reorganization scheme used by the business, Chapter 12 – used by family farmers and fishermen, and Chapter 15 – used for international cases
There is something very important that you should keep in mind when filing for either of the chapters and that is that you need to attend two educational courses – one prior to filing and one after the court decision. These courses are required according to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The first course to take is the pre-filing bankruptcy counseling course and you need to provide a certificate proving your completion of the course. The second course to take is the pre-discharge debtor educational course, which is kind of a personal finance management course. A certificate is also required otherwise the court will not discharge your debts. Quite often people forget about this second course because they believe that once the court has ruled out it means the bankruptcy process is over. Do not make this mistake and attend the course in order to have a successful completion of the entire procedure. The overall conclusion is that both types of individual bankruptcy have their pros and cons and therefore you should consider all your options well before proceeding further.
Alternatives to Bankruptcy
Even though bankruptcy can seem like the easiest and most efficient way to deal with your debts, in some cases it may cause you more harm than do good. If your situation is temporary, for example, you have piled up on unexpected medical bills but now you are healthy and back to work, then look for some other ways to cover this debt. One of the options is to start a second or even a third job. This will leave you with less or no free time but will help you gain resources for the repayment of the bills. You can also try negotiating with your creditors, who might be willing to lower your monthly installments or offer better interest rates if you tell them that you consider filing for bankruptcy. Another option will be to sell some of your property like your car, since if you file for a Chapter 7 Bankruptcy the court will sell it anyway. If you organize the deal, though, the chances are that you will get more money than through the court organized auction. Last but not least you can look for alternative sources of financing, such as peer-to-peer lending.
The bottom line is that filing for bankruptcy is a valid though not so pleasant option to deal with your debts and sometimes the only alternative to keep your home in case of foreclosure. It doesn't mean however, that you should not try to avoid it if possible. Otherwise, make sure to hire a knowledgeable attorney who has extensive experience in this field and who will give you proper advice.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.