What Happens If I Declare Bankruptcy?
There are many misconceptions about bankruptcy protection, and most of them revolve around the idea that filing for bankruptcy is one of the worst things you can do. Many of these misconceptions are pushed by the huge financial institutions that would rather you starve or be living on the street than not pay your bills. Fortunately, many of these popular misconceptions are not accurate. For many people, filing bankruptcy will get rid of most, if not all, of your debt. While many people treat bankruptcy as a last resort to be used only in cases of undue hardship, it shouldn’t be. Bankruptcy protection is designed to help you get rid of debt, and you should be aware of what happens if I declare bankruptcy.
Do different types of bankruptcies lead to different results?
A bankruptcy proceeding is the legal process of liquidating a debtor’s assets to pay off his or her debts with thee goal of the debtor receiving a discharge of their debts. In the bankruptcy law, there are several different types of cases available, and although they all share the goal of discharging debts of the debtor, each type of bankruptcy does so in a different way. Depending on your budget, your specific needs, and your overall financial situation, one type of bankruptcy may be a preferred choice over another.
For people thinking about filing an individual bankruptcy, there are 3 common types of bankruptcy that they will research. The first is filing bankruptcy under chapter 7. A chapter 7 bankruptcy is a liquidation bankruptcy. Subject to certain income limits, an individual debtor that files for chapter 7 bankruptcy will get to keep any exempt property, while nonexempt property will be liquidated and administered by the bankruptcy trustee for the benefit of unsecured creditors and not the secured creditor. (From time to time, someone will file a business bankruptcy under chapter 7, though it rarely makes sense since a business cannot get a discharge in chapter 7.)
A Chapter 13 bankruptcy is based around a repayment plan, where the debtor proposes a repayment plan where they will make monthly payments to the chapter 13 trustee for a period of 3 or 5 years.
Chapter 11 bankruptcy is known as reorganization bankruptcy, where the debtor can proposed reorganizing and adjusting debt, subject to creditor approval. Chapter 11 is often used for business bankruptcy (and, in fact, there is a small business bankruptcy path in chapter 11 cases).
Again, the goal of all bankruptcy proceedings is for the debtor to experience debt relief and the protection of the bankruptcy discharge injunction. Which chapter of bankruptcy an individual debtor decides to file under when filing personal bankruptcy, however, is really dependent on the totality of their financial circumstances at the time the individual decides to file bankruptcy.
How bad is declaring bankruptcy? What are consequences of bankruptcy filing?
It’s true: many people are scared of the idea of filing bankruptcy. There are many reasons, however, to consider it a primary option for people to get out from under debt. If you just can’t meet your regular living expenses, it may be the only way to get rid of unsecured debt, like medical bills, credit card debt, personal loans, or even secured debt like a bad auto loan or a judgment lien. Many people who are considering filing bankruptcy usually first look at alternatives to bankruptcy, because they think that filing bankruptcy is bad and only for the msot serious cases of undue hardship. Before deciding that filing bankruptcy is bad, it makes sense to look at what makes it “bad,” and any dire consequences of filing.
So what are some common misconception that make filing bankruptcy “bad?” First, if you hire an attorney to represent you, there are legal fees. While some people may consider it “bad” to have to pay legal fees, hiring an experienced bankruptcy attorney may be the best money you spend in a long time to make sure your bankruptcy case is done quickly, competently, and without you making any mistakes. Considering that many people that file bankruptcy on their own have their case dismissed, it may not be so bad to hire a bankruptcy lawyer.
Another common misconception that bankruptcy is “bad” is that you cannot rebuild credit. This is completely untrue. While the credit bureaus (Experian, Equifax, and TransUnion) report a bankruptcy filing for up to 10 years on a credit report, there is nothing stopping a person from rebuilding their credit after having their debts discharged. In fact, many people receive offers for credit cards and other unsecured debt immediately after their case is closed. Further, many people are able to buy a car or even a house just a few years after their bankruptcy filings.
What is the impact and downside of filing for bankruptcy relief?
If you’re reading this, there’s a good chance you’re considering filing for bankruptcy, and for good reason. Filing for bankruptcy may often be the fastest way to eliminate your debt and start fresh. There are some impacts that you do want to be aware of.
First, as stated previously, a notation of a bankruptcy filing may appear on your credit report for up to 10 years. While this doesn’t preclude you from rebuilding your credit, and buying a car or house in the future, it is something that happens. Some people believe that filing bankruptcy ruins your credit score. Reality, however, is that if you’re struggling to make payments, if you’ve got collections or even a lawsuit against you for consumer debts, your credit score was already likely seeing negative impact (and oddly enough, many people report a jump in their credit score immediately after filing a bankruptcy case).
Another impact of filing bankruptcy is that it is a public record. If you are applying for a car loan, a mortgage, or even an apartment in the near future, just be mindful that someone doing their due diligence will come across your bankruptcy filing.
Another aspect of bankruptcy is that you have to disclose a lot of information. When declaring bankruptcy, all your interests come into a theoretical bankruptcy estate, which the trustee is administering. As a result, the trustee will request information about unsecured debt, payments to any student loan, how tax debt was incurred, and so on. Even more information is requested if you own a business, including a sole proprietorship.
Other than the impact on your credit report, and the fact that a bankruptcy filing is a public record, there aren’t many other downsides for most people that file for bankruptcy relief.
What do you lose if you declare bankruptcy: Nonexempt Property
A bankruptcy proceeding doesn’t just revolve around your debts. One of the big concerns that many people have is that they fear losing all of their property in a bankruptcy case. While there is potential that someone that files a bankruptcy petition without understanding the bankruptcy laws may lose nonexempt property, it’s very rare that people lose property in the bankruptcy process unexpectedly. A competent and experienced bankruptcy counsel can help you identify any issues with filing bankruptcy, including any potential property that you run a risk of losing.
That’s why it’s important to understand how bankruptcy works before you decide to file a bankruptcy petition. Generally speaking, bankruptcy laws include exemptions. Exemptions are specific laws that identify property that is protected from creditors, as well as not included as part of a bankruptcy estate. There are federal exemptions as well as state exemptions. Each state has different laws around which set of exemptions you may use.
Once you know which exemptions you may use for your bankruptcy case, it’s just a matter of ensuring that any property that you have an interest in falls within an exemption that you may use. Any exempt property you are claiming must be clearly identified within your bankruptcy paperwork. If you have property that is not covered by an exemption, then it is nonexempt property, and that is property that a bankruptcy trustee may take to pay the unsecured creditor. (Generally, a secured creditor still retain its rights to enforce any secured debt against the property that is the collateral.)
Chapter 13 bankruptcy can be a little more forgiving as it relates to exempt property vs. nonexempt property. As mentioned above, you get to keep property depending on the bankruptcy exemptions you are able to use. Even if the bankruptcy exemptions you use cannot cover all your property, you can propose a repayment plan that pays creditors the value of your nonexempt property, while still keeping it. (This may come in very handy in the case of a sole proprietorship, where you have some tools or equipment you use in your business, but can’t use bankruptcy exemptions to protect.)
Now that you have an idea how property in bankruptcy proceedings works, you may be able to see why it’s rare for a debtor’s property to be unexpectedly taken. By understanding how the exemptions work, you should be well aware in advance of filing your case in bankruptcy court any property that may be at risk. A consultation with a bankruptcy lawyer may help to uncover this quickly.
Do you get out of all debts if you declare bankruptcy?
As mentioned before, the goal of declaring bankruptcy, regardless of whether it’s chapter 7 or chapter 13 bankruptcy, is the discharge injunction that is entered by the bankruptcy court, and rightfully so since it prohibits many unsecured creditors as well as secured creditors from attempting to enforce or collect a debt against the debtor.
Not all debts, however, are subject to the discharge injunction in the bankruptcy case. The Bankruptcy Code lays out certain debts that are nondischargeable. Those exceptions to discharge are found in Section 523 of the Bankruptcy Code. Some of the more common types of debts that are nondischargeable include debts for domestic support obligations (such as child support or spousal maintenance), certain debts to governmental units, and student loans.
The order of discharge does not spell out exactly which debts are discharged and which are not. The way to think about the discharge injunction is as follows: the discharge of debts applies to all debts, unless it is one of the debts listed in Section 523, or the creditor obtained a court order declaring that debt nondischargeable.
What Cannot be discharged in bankruptcy?
As shared above, a bankruptcy proceeding is a powerful legal remedy that helps people get out of debt by making those debts, whether held by unsecured creditors or even secured creditors, unenforceable against the debtor. Not all debt, however, is dischargeable in bankruptcy cases. Section 523 of the Bankruptcy Code enumerates certain classes of debts which are nondischargeable. Generally, some of the more common types of debts include:
- certain tax debt (although some tax debt may be dischargeable under bankruptcy law);
- debts incurred based on fraud;
- debts incurred in the 90 days before filing a case for luxury goods or services;
- domestic support obligation debts;
- debts related to willful or malicious injury caused by the debtor;
- certain kinds of debts to governmental bodies;
- student loan debts;
- debts as a result of the debtor causing death or personal injury in a car, plane or boat accident if the debtor was under the influence of alcohol or drugs
Many people that file bankruptcy do so because of credit card debt, personal loans, medical bills, car loans that they fell behind on, and so on. As you may be able to see, none of those debts generally fall under the exceptions to discharge of Section 523. As such, you can assume that the discharge applies to those debts unless the debt may fall under one of these categories, or there was a court order entered that the debt is nondischargeable.
Can I keep my car if I file bankruptcy?
As we have shared in this article, there are many misconceptions around filing for bankruptcy, and those misconceptions definitely exist around whether you can keep your car if you file bankruptcy. The reality is that in most bankruptcy proceedings, most debtors are allowed to keep their car through bankruptcy, subject to certain considerations.
If you skipped over it, you’ll want to go back to our discussion about exemptions above, because it’s necessary to understand whether you can keep a car in bankruptcy and why.
If you’re leasing a car, you have the option to reject the lease, and return the car to the creditor. The lease will be discharged, and you will not be further liable for anything under that lease. If you want to keep a car that you are leasing, then you must assume the lease. This means that you will continue making payments under the lease, and you agree to remaining liable under it.
If you own a car outright (not leasing nor financing), it depends on the value of the car, and the exemptions you may use. If you own a car and the value is less than the exemptions you may use, then you may keep the car. If, however, you own a car and the value is more than the exemptions you may use, then if you want to keep the car, you will have to pay the nonexempt equity portion to the bankruptcy trustee, otherwise you will have to surrender the car.
If you have car loan, there are two things to keep in mind. First, the same analysis we did above about the vehicle equity has to be done (the value of the car minus any exemptions and any loan against the car equals the nonexempt equity). Second, the secured creditor will ask you to enter into a reaffirmation agreement to keep a car that you are financing. A reaffirmation agreement reinstates your liability under the secured debt car loan.
Click here for a more detailed dive into whether you can keep your car if you file bankruptcy (and check out this article if you’re wondering if you can file bankruptcy and keep your car even if it’s expensive ).
How much does it cost to declare bankruptcy?
Bankruptcy is often treated as a last resort for people that have found themselves unable to pay their debts and struggling to get out from under the crushing weight of that debt. One of the biggest questions people often have is how much does it cost to declare bankruptcy. In many cases for individual debtors, there are three different costs that you need to be aware of.
The first is the bankruptcy court filing fee. Each of the different chapters of bankruptcy have a different filing fee associated with filing a bankruptcy petition under that chapter. Depending on which chapter of bankruptcy that you are filing under, there is a different filing fee. Keep in mind that individual debtors may also request to pay the filing fee in installments, or if you are facing an undue hardship in your finances, an application to waive the filing fee. You can learn more about the current filing fees here .
The second part of the cost in the personal bankruptcy process are the costs associated with the two courses. Under the Bankruptcy Code, everyone that files bankruptcy must complete two courses. The first course, known as the credit counseling course, must be completed prior to filing your bankruptcy case. The second course, known as the debtor education course or financial management course, must be completed prior to the entry of the discharge order in your bankruptcy case. You must complete these courses with a credit counseling agency approved by your bankruptcy court to issue the certificates. Many of the approved credit counseling agencies make both the credit counseling course and the debtor education course available to complete online or over the phone.
The final part of the cost to declare bankruptcy are legal fees that you would pay to a bankruptcy lawyer. As we’ve shared earlier, a bankruptcy lawyer can help you file for bankruptcy protection quickly and easily. Since there are no set fees for bankruptcy attorneys, you may have to do your own research to find an attorney that you feel comfortable working with. You can click here to learn more about how much bankruptcy lawyers charge in New York City .
Can I buy a house after bankruptcy?
If you are thinking about filing bankruptcy, you may want to know if you will be able to buy a house and have the “privilege” of making a mortgage payment in the future. Most people don’t realize that it is, in fact, very possible to buy a house after bankruptcy. While mortgage lenders will often not approve mortgage loans for someone that just filed personal bankruptcy, many lenders will approve mortgage loans for people in as little as 2 years from their discharge. (In some cases, FHA loans may be approved in as little as 1 year after your bankruptcy case!)
Can you file bankruptcy on personal loans?
In bankruptcy, you don’t pick and choose what’s included, and exclude others. Everything that’s part of your financial picture – all your income, all your expenses, all your assets, all your debts – come into your bankruptcy case. Generally, yes, you may file bankruptcy not only because of credit card debt but also for personal loans. As discussed above, the bankruptcy discharge injunction is presumed to apply to all your debts, unless that debt falls under one of the nondischargeable debt classes, or a court order stating the particular debt is nondischargeable. As a result, once you get a discharge, the unsecured creditor, as in the case of a personal loan, cannot attempt to collect or enforce that personal loan against you.
Can you file bankruptcy on student loans?
Although a student loan lender is an unsecured creditor, as mentioned above, student loans are generally not dischargeable in bankruptcy. Section 523 of the Bankruptcy Code excepts student loans from discharge. There are circumstances, however, where you can ask the bankruptcy court to determine that a student loan be declared discharged. Although the standard under the law varies around the country, many courts may enter an order discharging student loans if the debtor can demonstrate that having to continue to be liable for the student loans would be an undue hardship.
How does filing bankruptcy impact my credit report?
As shared above, while filing bankruptcy has an impact on your credit report, it’s not permanently damaging. What’s more important is how you handle your credit after you’ve cleared your debt. This will have the biggest impact on how quickly you gain pick up your credit score and how much your credit rebuilds after your bankruptcy case.
The credit bureaus may report your bankruptcy case on your credit reports for up to 10 years. That, however, is not the end of the story. After all, the promise of a discharge of debts is a financial fresh start. Many debtors that file bankruptcy report a boost in their credit scores immediately after their bankruptcy filing. Additionally, many debtors report receiving new credit card offers almost immediately after their bankruptcy case is closed. If the goal is buying a home in the future, many lenders will approve mortgage loans to people that filed bankruptcy in as little as 2 years after their case (and in some cases, in as little as 1 year).
If you’re struggling with paying your debt, you have to ask yourself this consumer proposal: would I realistically be able to create a consumer proposal to pay off my debt, or does it make sense to file bankruptcy and get a financial fresh start in as little as 4 months? For many people, the debt relief via bankruptcy discharge is the quickest, easiest and most affordable way to a better financial future.
There are a lot of misconceptions surrounding bankruptcy. Those who have been through bankruptcy understand that it has many positive and negative impacts. If you decide that bankruptcy is the best option for your situation, then you may want to know what happens if I declare bankruptcy. As you’re making your decision, it’s important to understand what happens if you declare bankruptcy. There exist many misconceptions about the bankruptcy process, as well as consequences of bankruptcy that simply aren’t accurate.
One of the best ways to inform yourself is to have a conversation with a competent and experienced bankruptcy law firm, like the Law Office of Richard Kistnen. Imagine your life AFTER debt relief – after receiving a discharge of your debts and a financial fresh start! The quickest, easiest, and most affordable way there may be bankruptcy, and the best way to get started is to book your confidential, no-obligation consultation today by clicking here, or use the contact info below to schedule your consultation now.