Debt can weigh you down and impede your ability to make meaningful financial progress. Therefore, it is unsurprising that many people consider filing bankruptcy a solution. Declaring bankruptcy is a big decision with long-term effects, even though it could seem like a fast way to reverse your financial challenges and start afresh. The information below explores the ins and outs of filing for bankruptcy, including its possible relief and effects on assets, credit score, and future financial prospects.

Let us look at bankruptcy comprehensively before you decide. We have addressed the potential benefits and long-term costs of filing for bankruptcy.

How Does Bankruptcy Work?

Events in life can strain finances. These include divorce, the death of a family member, medical crises, or losing your job. All these may make you think about filing for bankruptcy. Since every circumstance differs, you can face difficulties other than those mentioned. In the end, filing for bankruptcy could provide relief if your debt is out of control due to various life events.

The automatic stay is one of the advantages you enjoy immediately upon declaring bankruptcy. The automatic stay protects you against most lawsuits, wage garnishments, creditor collection operations, and foreclosure procedures.

By temporarily stopping creditor harassment and allowing you time to consider your options and financial status, the automatic stay provides immediate relief. Additionally, it prevents creditors from filing for bankruptcy while your case is pending to recover unpaid bills. It is a significant benefit of filing for bankruptcy and can give you the much-needed respite you need if you are drowning in debt.

Note: The automatic stay does not apply to all actions, including criminal procedures, specific tax audits, and domestic support duties. In addition, there are situations in which creditors could file a request for relief from the automatic stay, like when eviction or foreclosure of secured property occurs.

Following the automatic stay's implementation, parties filing for bankruptcy usually have two basic choices to consider:

  • Seeking debt discharge — Filing for Chapter 7 bankruptcy allows you to have certain debts discharged, which releases you from any duty to pay them back. There may be an ability to discharge some debts, like credit card debt, medical costs, and personal loans. Debts resulting from fraud or illegal behavior, certain tax obligations, and student loans are among the few exceptions to the general rule that all debts are dischargeable.

  • Developing a debt repayment plan — To progressively pay off your obligations over three to five years, you must create a repayment plan approved by the court in Chapter 13 bankruptcy. You can pay your creditors in small amounts while keeping your assets under this arrangement. It considers the worth of your assets, expenses, and income. Any remaining qualified debts may be discharged upon successful completion.

Several variables determine whether you choose to repay your debts through an installment plan or have them discharged. These include your income, expenses, and the type of bankruptcy you filed.

Various Types of Bankruptcy

Depending on their unique needs and circumstances, various bankruptcy chapters are available to individuals and businesses. Different chapters of the US Bankruptcy Code are available. Each chapter is specifically designed to handle unique financial circumstances and provide suitable relief.

  • Chapter 7 bankruptcy — This is a choice both people and companies can make. If you have few assets to safeguard and a significant amount of unsecured debt, you can choose Chapter 7. If you are a business owner and want to sell off assets and stop operating, Chapter 7 may be your best option. This will usually result in the liquidation of your business.

  • Chapter 13 bankruptcy — Mostly intended for individuals, Chapter 13 lets you restructure debt and create a three- to five-year repayment schedule. It is the best option if you are well-off and want to keep your assets while making up for past-due payments.

  • Chapter 11 bankruptcy — This chapter is also available to individuals, particularly those with large debts or complicated financial situations. This bankruptcy chapter is most frequently linked with corporate reorganization. It allows you to continue with business or personal matters while restructuring debt.

  • Chapter 12 bankruptcy — Designed especially for small-scale farmers and fishermen, Chapter 12 assists with a repayment schedule based on your seasonal income. It provides flexibility for people or families that work in agriculture or fishing.

  • Chapter 9 bankruptcy — Reserved for towns, Chapter 9 bankruptcy permits qualifying local bodies to reorganize debt while carrying on with vital services for citizens. Individuals or businesses cannot use this option.

Let us explore the impact of filling out Chapter 7 and Chapter 13 because these two are the chapters you will most likely file.

Chapter 7 Bankruptcy

You may be subject to "liquidation" bankruptcy under Chapter 7 if your income is too low to settle your dues. In this case, a trustee manages the sale of your non-exempt assets. He/she will sell off the assets, and the money raised will be used to pay back your creditors as much as possible.

However, liquidation does not apply to every one of your assets. Federal or state legislation may exempt some assets from liquidation. It will allow you to keep ownership of them. Furthermore, in Chapter 7, bankruptcy, particular taxes, child support, and school loans are among the debt categories that are not dischargeable.

Any eligible debts remaining after the liquidation procedure is finished and any non-exempt assets sold are usually discharged. This provides a clean financial slate by removing your legal obligation to repay those loans.

Individuals or companies with large amounts of unsecured debt and limited assets that qualify for exemptions opt to file for Chapter 7 bankruptcy.

Assets not shielded from liquidation during bankruptcy proceedings are known as non-exempt assets. The trustee in bankruptcy could sell these assets to pay off creditors. Valuable personal property, real estate with significant equity, investments, priceless collections, and opulent objects are a few examples of non-exempt assets.

In contrast, assets immune from liquidation during bankruptcy proceedings are exempt assets. These assets are necessary to support your fresh start after bankruptcy and maintain a minimal standard of living.

Advantages of Chapter 7 Bankruptcy

The term “liquidation” has an end to it. However, filing for Chapter 7 bankruptcy opens you to several advantages. Here are a few reasons why you should consider filing for Chapter 7:

  1. Immediate Relief From Debt

The courts immediately cease all collection efforts upon filing for Chapter 7 bankruptcy. This happens thanks to the automatic stay. This legal provision stops most creditor actions, including mailings, phone calls, wage garnishments, and foreclosure procedures. This immediate relief provides you with the room you need to assess your financial condition and make financial adjustments for the future.

  1. It is Quick and Less Expensive

Chapter 7 bankruptcy provides a comparatively quick and affordable way to address your financial difficulties. The process sometimes only takes a few months, from filing to debt discharge.

Chapter 7 bankruptcy is less costly than alternative solutions when considering the expense of the process. Although there are still fees associated with Chapter 7, including filing fees with the court, administrative costs, and maybe attorney fees if you decide to retain legal counsel, overall costs are usually cheaper because Chapter 7 usually does not entail a protracted repayment plan.

  1. Chapter 7 Imposes No Minimum Debt Requirement

You can file for bankruptcy protection under Chapter 7 bankruptcy regardless of the amount you owe because there is no minimum debt requirement. You gain from this flexibility since it guarantees that organizations or people with different debt amounts can obtain Chapter 7 bankruptcy relief. Chapter 7 bankruptcy can offer relief from debt, regardless of the debt level. This is accomplished by eliminating eligible debts and granting a fresh financial start. This comprehensive strategy makes debt relief accessible to anyone, irrespective of debt amounts. Thus, it is a good choice for people or companies in financial trouble.

Disadvantages of Chapter 7 Bankruptcy

Before deciding, you should also weigh the downsides of filing for Chapter 7 bankruptcy. Despite the advantages above, there are several disadvantages that you must be aware of, namely:

  1. Negative Impact on Your Credit Score

For several reasons, filing for Chapter 7 bankruptcy lowers your credit score.

Filing for bankruptcy makes your record publicly accessible to credit bureaus and can stay on your record for up to ten years. This lets possible creditors know that you have had money problems. Filing for Chapter 7 bankruptcy also actively discharges many of your debts. This makes them unenforceable in court. As a result, canceling debt-related accounts shortens your credit history and negatively affects your credit score.

Furthermore, declaring bankruptcy under Chapter 7 might drastically lower the amount of credit available to you. It will raise your credit utilization ratio. A high credit utilization ratio has a direct detrimental impact on your credit score.

Prospective creditors can also intentionally interpret a Chapter 7 bankruptcy filing as evidence of carelessness with money or an incapacity to handle debt properly. This view may result in higher interest rates and less favorable terms when you qualify for credit. Alternatively, it may make lenders reluctant to give you credit in the future.

  1. Loss of Property

Creditors may sell non-exempt assets in Chapter 7 bankruptcy to pay off debts. Even though there are exemptions that exclude particular assets from liquidation, you could still lose valuable property, like a home or automobile, depending on your unique situation. Property loss could significantly affect your capacity to maintain your lifestyle or run your business.

Chapter 13

If you have a steady source of income, Chapter 13 lets you rearrange your debts and pay them back in whole or in part over time. Chapter 13 bankruptcy allows you to suggest a repayment plan. It differs from Chapter 7 bankruptcy, which requires selling assets to pay creditors. You submit a repayment plan, including your debt payback strategy, to the court when filing for Chapter 13 bankruptcy. The chapter reduces or delays repayment for some obligations. These include credit card debt or medical expenses. At the same time, it prioritizes others, like tax or mortgage arrears.

Once you file for Chapter 13 bankruptcy, you pay a trustee regularly when the court authorizes the plan, and the trustee disburses money to creditors. During this period, creditors are unable to pursue collections.

Advantages of Chapter 13 Bankruptcy

There are several reasons you should consider filing for bankruptcy under Chapter 13. These include the following:

  1. Chapter 13 Could Offer a Flexible Repayment Plan

You will have the opportunity to make up missing payments thanks to Chapter 13's adjustable payment schedule. Part of the process is submitting a repayment plan to the courts, explaining how you will pay back your obligations. With this approach, you can restructure some obligations for lower sums or longer terms while giving priority to others.

Chapter 13 allows you to catch up on missed payments, like mortgage or auto payments. You could budget and gradually bring your financial commitments up to date using the plan's planned approach.

  1. You Can Avoid Foreclosure

Filing for Chapter 13 bankruptcy lets you avoid foreclosure. An automatic stay stops all foreclosure actions the moment you file for Chapter 13. During the repayment plan, the stay gives you the chance to make up missed mortgage payments. It also gives you immediate relief from the approaching prospect of foreclosure.

However, you will keep your house and avoid foreclosure by adhering to the conditions of your Chapter 13 plan. You also need to pay your bills on time.

Disadvantages of Chapter 13 Bankruptcy

Chapter 13 has some downsides worth considering. They include the following:

  1. You Should Have a Regular Income

Meeting the Chapter 13 criteria of regular income can be difficult for those who are thinking about filing for bankruptcy. You need to show that you have a reliable source of income that can support both the suggested repayment plan and your living expenses to be eligible.

It could be challenging to create and stick to a repayment plan that satisfies Chapter 13 standards if your income is erratic or insufficient.

  1. Your Debt is Only Discharged When the Term Ends

You have to follow the three- to five-year repayment plan that the court approves during Chapter 13 bankruptcy. You pay the trustee regularly during this time, and the trustee disburses money to creditors in accordance with the conditions of the plan. During this period, specific debts might be totally settled, while others would only get a portion of their balance.

If there isn't an instant debt discharge, you still have to make sure you follow the plan's repayment guidelines for the whole time. One could argue that this is a drawback since it makes it take longer to get a clean slate and pay off any outstanding eligible debt.

Furthermore, it could be difficult to continue making payments for a long time if circumstances change during the repayment plan duration. Unexpected circumstances like losing your job, having physical problems, or experiencing other financial difficulties could make it difficult for you to fulfill your repayment commitments, which could compromise the viability of your Chapter 13 bankruptcy.

Find a Bankruptcy Attorney Near Me

Maneuvering bankruptcy can be challenging, especially when considering which chapter to file based on your circumstances. However, with the assistance of a bankruptcy attorney, you will be in a position to pick the right chapter and determine if bankruptcy is the right option for you. Call Modesto Bankruptcy Attorneys at 209-314-3010 for further assistance.