How does bankruptcy work?
Bankruptcy is a court process that can be initiated either by an
individual or a creditor. It works well for most of the individuals
since they are able to discharge debts partially or completely.
There are primarily
2 types of bankruptcy:
The other types of bankruptcy are as follows:
- Chapter 9
- Chapter 11
- Chapter 12
- Chapter 15
The main objective of bankruptcy is to:
- Help consumers start a new financial life
- Help creditors retrieve money as much as possible
When should you declare bankruptcy?
You can seek help from the court and pay back your creditors under the following circumstances:
- You have failed to reach an agreement with creditors
- Your debt obligations are far more than your assets
- You're facing lawsuits and you would want to stop them
- You've received foreclosure notice and you don't want to lose home
- You've failed to manage finances even after consulting with a credit counselor
- Your wages have been garnished and you'd want to stop that
- You want to stop the lender from repossessing your vehicle
- You want to stop the collection calls
What do you need to do before filing bankruptcy?
Check out the
6 things that you need to do before paying back your creditors with the help of bankruptcy trustee.
- Have a look at your financial situation and create a budget
- Prioritize your debts and schedule payments
- Try various programs to get relief from your financial problems
- Check out your credit score once
- Consult an attorney to get the best bankruptcy advice
- Go through a free and pre-bankruptcy counseling
How can you declare bankruptcy?
A lot of consumers wonder how to declare bankruptcy since it is such a
complex legal process. Well, consumers can file it by filling out
various kinds of forms. This is mainly referred to as bankruptcy
petition. Once, consumers have submitted the forms in the district
bankruptcy court, automatic stay is imposed on the collection process
and lawsuits.
Consumers have to give accurate financial details in the forms.
Otherwise, courts will simply dismiss the case. The entire process is
supervised by the court appointed bankruptcy trustee. Consumers will
have to contact the trustee under the various stages of the legal
process.
The consumer has to mention his average income over the last 6 months. If the consumer's
income is below state median income, then Chapter 7
is the right option for him. If the consumer's income is above the
state median, then he has to go through the means test. This test is
quite important as it'll determine if the consumer can make payments for continuously 3-5 years and opt for Chapter 13.
How does it affect your credit report and score?
Your credit report would show that you're bankrupt. Chapter 7
bankruptcy would stay on your credit report for 10 years whereas Chapter
13 bankruptcy would appear for 7 years. It takes around 5 years to
complete Chapter 13 case. This means that it will be there on the credit
report for 2 more years after consumers get discharge.
Your
credit score may or may not drop after seeking help from the court. It
basically depends upon your credit situation. Bankruptcy helps you
discharge most of unsecured debts like credit cards. When you're able to
discharge all your credit cards at one go, your credit utilization
ratio ratio becomes zero. This pulls up your credit score automatically.
In most of the cases, people opts for this debt relief option
when their credit is already in a poor condition. So, the impact on
their credit score might be slightly less.
Bankruptcy may drop one's credit score by almost 200 points. So, sometimes experts ask consumers to stay away from it
as long as they can. However, this is also true that if consumers are
able to manage finances in a better way, then they would be able to
restore credit after some time.
Conclusion
Finally,
bankruptcy involves a lot of paperwork and legal
formalities. If you don't have an adequate knowledge about the laws,
then it would be best to consult an attorney and complete the legal
process successfully.
