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Bankruptcy – Everything You Need to Know

Everything you need to know

Filing for bankruptcy protection is considered a statement on your ability to repay your debt to your creditors. Filing for bankruptcy will also put a halt to foreclosure or legal actions against you, and it stops creditors from calling and demanding payment. A bankruptcy case normally begins when the debtor files a petition with the bankruptcy court. A petition may be filed by an individual, by spouses together, or by a corporation or other entity. All bankruptcy cases are handled in federal courts under rules outlined in the U.S. Bankruptcy Code.

These are the bankruptcy types, usually referred to by their chapter in the U.S. Bankruptcy Code according to

  • Individuals: Filing under Chapter 7 or Chapter 13, depending on the specific situation.
  • Municipalities (cities, towns, villages, taxing districts, municipal utilities, and school districts): May file under Chapter 9 to reorganize.
  • Businesses: May file under Chapter 7 to liquidate or Chapter 11 to reorganize.
  • Farmers and fishermen: Chapter 12.
  • Bankruptcy filings that involve parties from more than one country are filed under Chapter 15.

When should you file for bankruptcy?

Bankruptcy is a legal process that can help people who can’t pay their bills. It allows you to get relief from some – or in some cases even wipes out all your debts – and get a fresh start. If your debts have become unmanageable, bills are piling up, or you’re facing foreclosure on your home, you might be thinking about declaring bankruptcy to fix your financial situation.

It is important to have in mind, before filing for bankruptcy, the consequences that are worth considering before you make any decisions. Therefore, this process must be considered a last resort. There are some alternatives that are worth exploring. For example, find out if your creditors are willing to negotiate – in some cases creditors will agree to accept reduced payments over a longer period. Even the Internal Revenue Service (yes, even Uncle Sam) is often willing to negotiate.

What should you NOT do before filing bankruptcy?

I understand that nowadays it is easy to fall for the temptation of buying online 24/7, but don’t. Avoid new debt during the 70-to-90-day period before filing for bankruptcy. Your creditors can object to your request for a bankruptcy discharge based on bankruptcy fraud.

The bankruptcy trustee may also try to recover money or properties setting aside certain transfer that you’ve made within 90 days before filing bankruptcy. The trustee can also undo security interest and other pre-filing bankruptcy can be treated as fraudulent conveyance and undone by a trustee.

What are the downfalls of filing for bankruptcy?

If you are currently having problems paying your bills, I can understand bankruptcy can be seen as a great option at this moment to start fresh. However, the potential negative impact on your credit and your immediate finances is something you need to consider. Additional factors regarding the downsides of filing for bankruptcy can include:

  • Negative impact on your immediate financial future
  • Obtaining credit after filing for bankruptcy and increased interest rates.

It’s important to keep in mind that bankruptcy remains on your credit report for up to 10 years and will continue impacting your score that entire time. Because of this it is going to be difficult to obtain new credit. If you can qualify for loans, they will likely have high interest rates and reduced credit limits. Depending on the type of bankruptcy you file for, you may have to wait for around four years before applying for a home loan.

How do I prepare myself for bankruptcy?

The first thing you need to understand is there are different kinds of debts and, under the law, some of these cannot be discharged through bankruptcy. Some of them are tax debt, domestic support obligation such as child support and alimony, debts incurred through fraudulent acts, debts arising from criminal behavior (driving under the influence of alcohol, just to mention an example), and student loans.

In most cases, making the minimum payments on debts is not a viable option if the goal is to be debt free in 5 years. With a Chapter 7 bankruptcy, all your unsecured debt will be discharged within 3-6 months, while Chapter 13 will have your debt free in 3-5 years, at a fraction of the cost of paying off your full debt plus interest.

If you do not qualify for any of the Chapter 7 requirements, you can opt for Chapter 13, which still allows you to discharge some, or all your unsecured debt and, at the same time, receive protection from the court and keep your assets.

This basically means that even if there is no way to discharge your nondischargeable debts, you can pay them off with this type of bankruptcy by discharging other debt to free up cash and creating a manageable court protected repayment plan for nondischargeable debts.

Before filing for bankruptcy, I highly recommend taking care of these tasks, so you can minimize the consequences that I exposed previously:

  • File your taxes.
  • Avoid new debt.
  • Attend credit counseling.

How much should you owe before declaring bankruptcy?

Bankruptcy can be an option for you, no matter how high or low your debts are. However, the bankruptcy court does not have an outline regarding the minimum debt threshold, there are certain requirements that you need to meet to qualify:

  • Filing history requirements: you may not be eligible to file for another bankruptcy if you have filed and been discharged from a bankruptcy in the past.
  • Income requirements: To qualify for Chapter 7, you need to pass the Chapter 7 Means Test wherein your income will be compared to the income of other families of your size within your state. This test determines whether you have the capacity to pay off your debts.
  • Other acceptable debt requirements: It is important to note that only certain types of debts can be discharged under this type of bankruptcy. Unsecured debt such as payday loans and credit card debts can be discharged in bankruptcy.

Can I spend money after filing Chapter 7?

If you choose to file bankruptcy, you must decide which type is best for you, based on your own situation (Chapter 7 or Chapter 13). Chapter 7, also known as a liquidation, is simpler and takes less time to file. Most people file under this chapter because you can wipe out most of your general unsecured debts without having to pay back the money you owe through a repayment plan. However, some of your property will probably be sold by a trustee to pay your creditors, so Chapter 7 works best if you have little or no assets.

If you decide to file your Chapter 7 case, you should not spend any money or dispose of any assets you own. Without court approval, the Chapter 7 Trustee can force the recipient to return the money or property. However, the income you receive after filing your case is yours to use. Once the trustee abandons its interest in your property, that property reverts to you. At that point, you have the right to spend money or dispose of your property, no matter when you acquired it.

If you are facing a tough financial situation, and you are considering filing for Bankruptcy, let us take care of your taxes first. Let’s find out if the IRS owes you, and if you owe them, the IRS may be willing to negotiate, or at least, to get partial payments. Call us today!

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