If you’ve explored every debt relief option possible and there simply doesn’t seem to be any solution that will save your finances from too much debt, sometimes your only choice left is to declare bankruptcy. If you’re in a position where bankruptcy really is your only option, you want to make sure you proceed with your bankruptcy filing in a way that’s going to set you up for a better financial future moving forward. To do this, you need to make informed, educated decisions at every stage of your filing.
Bankruptcy isn’t the end of your financial future and brighter days can be on the horizon if you proceed correctly. Call us at to speak with a certified credit counselor. They can make sure bankruptcy really is your only option left and provide recommendations on what you need to do to put yourself in the best possible position as you move forward.
Chapter 7 filing versus chapter 13 filing
There are two kinds of bankruptcy filings you can choose from. A Chapter 7 bankruptcy filing is where you ask the court to completely discharge your debts, using any existing assets you have to pay out. A Chapter 13 bankruptcy filing sets up a court-approved payment plan to pay a small part of what you owe over the next 3 to 5 years.
In both cases, a bankruptcy penalty is applied to your credit report and stays on your credit history for up to 10 years—3 years longer than most other penalties, such as debt settlement. Even after 10 years, the bankruptcy may be reported when you seek employment at a new job, or apply for a personal loan or life insurance policy. With both Chapter 7 and Chapter 13 filings, the stigma of bankruptcy may very well be with you for the rest of your life, so it’s not a decision that should be made lightly.
There are other differences between the two filing options besides partial repayment or a complete discharge of your debts. A Chapter 7 bankruptcy doesn’t protect you from losing your home to foreclosure, whereas a Chapter 13 may allow you to avoid foreclosure. Since the Chapter 13 bankruptcy filing includes partial repayment of your debts, you will have a trustee that you send payments to and then they divide the money accordingly amongst your creditors. In both cases, creditors must stop any action to collect on your debts and cannot pursue any further litigation against you.
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA)
Bankruptcy law was heavily revised in the U.S. in 2005 to make it much harder to file—particularly if you wish to file for Chapter 7 bankruptcy. The idea was to protect financial institutions from the severe losses they experience as a result of a Chapter 7 filing. This was done to counteract a trend of bankruptcy fraud and filing abuse from consumers trying to get out of paying what they owe. As a result, bankruptcy courts are now much stricter in their evaluation of bankruptcy cases.
Among numerous new provisions, the main change of the BAPCPA was the creation of a “means test.” This test measures a consumer’s income versus the median (average) income for their state to determine if you are eligible to file for bankruptcy at all. It also now requires you provide proof of mandatory credit counseling, as well as a debtor education class. Due diligence must also be shown by your lawyer that a “reasonable investigation” was conducted on any and all information you provided.
Other provisions from BAPCPA include:
- New rules that make it harder to avoid liens by declaring bankruptcy.
- Stricter stipulations on what qualifies as a presumption of fraud, so creditors can request a discharge of a bankruptcy filing if you spend too much money on credit after filing or have too much money taken out in payday loans.
- An increase in the amount of time that must pass between multiple Chapter 7 filings for one individual—the time was increased from 6 years to 8 years.
What are the advantages and disadvantages of bankruptcy?
Bankruptcy is not ultimately all bad—if you simply don’t have any other options left, it gives you a means to close out this chapter of your life to get a fresh start. It automatically stops any harassment from creditors or collections agencies, so you almost immediately get a little peace of mind back once you’ve filed. You may be able to save your house, and in some rare cases your creditors may even allow you to keep your credit card assuming you can reach a mutually acceptable agreement and they have a reasonable amount of confidence you will be responsible and pay your debts back in the future.
The credit penalty for bankruptcy can stay on your credit report for up to 10 years and may always be a factor that comes up when you apply for a personal loan or life insurance policy. You may have a harder time getting any new line of credit, including buying a new home or car. While it’s illegal for your current employer to fire you for declaring bankruptcy, your credit report may be taken into consideration when you’re applying for new employment as well—particularly for any business related to the financial sector.
If you’re worried about how much of a negative impact a bankruptcy will have on your financial future, give us a call at . A trained credit counselor can help review your options and answer any questions you have about how declaring bankruptcy will affect your finances now and in the future.