Top Bankruptcy Basics

Published on Mar 16, 2015 11:28 am

When your monthly bills are more than you can manage, bankruptcy may seem like your only way to get out of debt. But while bankruptcy can provide debt relief to consumers who can’t pay their bills, it’s a complex legal process that can seriously impact your credit for up to a decade. Before you decide to pursue bankruptcy, it’s important to explore alternative solutions, and to understand the process and the potential ramifications of filing for bankruptcy.

Before You File for Bankruptcy

When you can’t pay your bills, is bankruptcy the only solution? Talking to your creditors could be a better first option. They may be willing to work out a payment plan that’s more manageable for you. A government-approved credit counselor or credit repair company may also be able to help you negotiate a debt-repayment plan with your creditors. You might also research debt consolidation to see if it’s right for your situation.

If you decide to file for bankruptcy, you’ll have to meet certain criteria and fulfill specific requirements. According to the Federal Trade Commission, before you can file for bankruptcy you will need to undergo credit counseling from a government-approved organization no more than 180 days before you file, and take a debtor education course.

Types of Bankruptcy

Most consumers who declare bankruptcy do so under Chapters 7 or 13 of the federal Bankruptcy Code. You’ll have to file in federal bankruptcy court and will be responsible for filing fees (several hundred dollars) and your attorney’s fees.

  • If you file Chapter 7 bankruptcy – also known as “straight bankruptcy” – you may be allowed to keep certain exempt property, such as work equipment, some money, clothing and home equipment. The rest of your possessions and assets will be sold under the supervision of a federal court trustee. The money raised from the sale will be parceled out to various creditors. Once you’ve declared bankruptcy, most creditors cannot seek further payment from you. However, this does not mean you can skip out on all financial burdens. Court-ordered alimony and child support, most taxes and, under most conditions, student loans will remain after a Chapter 7 bankruptcy. Once your debts have been discharged through Chapter 7 bankruptcy, you won’t be able to file again for eight years, according to the FTC. The record of the bankruptcy will stay on your credit report for 10 years.
  • Chapter 13 bankruptcy does not completely discharge all debts. Instead, you’ll be allowed to keep your property in exchange for negotiating a three- to five-year repayment program, which may include all or only part of your total debt, and must be approved by a court trustee. Once you’ve completed the repayment program, your debts will be discharged. The record of your Chapter 13 bankruptcy will remain on your credit report for seven years, and you will have to wait two years after the debt is discharged before you could file again for Chapter 13.

The Potential Impact of Bankruptcy

All types of bankruptcies are legal actions that will show up on your credit report, where they can be seen by potential lenders and other creditors, such as landlords, insurance companies, mobile service providers and possibly even a future employer. Negative information on your credit report can make it more difficult to obtain credit, or to obtain it at favorable rates. While unpaid bills can negatively impact your credit, a bankruptcy can be a much bigger strike against you. Before filing for bankruptcy, get professional advice and review all your options.




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