Even though there are legal, financial and emotional consequences to filing bankruptcy, many people choose to go this path. That’s why bankruptcy is a last resort for people and businesses. Many companies and people file for bankruptcy and continue their business as usual. That said, bankruptcy is often poorly understood, so this article will help you learn more about it. Generally speaking, people file for bankruptcy when they believe they have exactly zero chance to meet their debt obligations.
A lot of people think bankruptcy makes you free from all debt obligations, but that’s not the case. You still have to pay up, and how you will pay up depends on what kind of bankruptcy you actually file: Chapter 11, Chapter 7, Chapter 12 or Chapter 13. There are other types of specific bankruptcies too, but these four are the most common ones.
The first thing that happens is something called the automatic stay. When the ‘automatic stay’ goes into effect, nobody to whom you owe money may try to collect that money you owe them. Many of people who once filed for a bankruptcy stated that the relief from fear of debt collectors is the greatest benefit of bankruptcy. As mentioned above, people file under different Chapters in certain circumstances.
For example, in a Chapter 7 case, all of your property becomes part of something called ‘the bankruptcy estate’. A person called the trustee is responsible for making sure that people to whom you owe money receive as much as they are allowed under the law. The trustee does this by selling the property of the bankruptcy estate on an auction. If you have pledged certain property as security for a debt, such as a house for a home loan, that debt is called secured debt. A person’s secured debt is usually just cars and houses. All other debt is unsecured. This often includes medical bills and credit cards.
At the auction, in case that the trustee sold your house for more money than you owe to a secured creditor, then the rest of the money is distributed among unsecured creditors.
In case that a debtor files a Chapter 13 bankruptcy, this means that the debtor will make one payment a month to a bankruptcy trustee. This money will be distributed by the trustee to the creditors according to a plan that you have proposed and the court has confirmed. As you already know, when someone loans you money, they charge interest on that, which is extra money you pay them. The court has established an interest rate that is a maximum during bankruptcy. If a debtor is charged more than the presumptive rate, the debtor can reduce the interest rate to that amount.
In a Chapter 13 case, all secured creditors must be paid in full. On the other side, the unsecured creditors will receive some portion or even none, of the money you owe them, based on the plan.
Chapter 11 bankruptcy is very similar to Chapter 13, but it’s typically reserved for business, and basically means a restructuring for the company. Businesses can file for Chapter 7 too, but this usually means a liquidation of assets. Businesses get to keep their stuff and keep their creditors at bay while they continue their operations, but they have to come up with a plan to pay off at least some of their debt or maybe get it forgiven by the creditors. Chapter 7 debtors have to attend a meeting with the trustee, this meeting is also known as the 341 meeting. In most cases, creditors do not attend the 341 meeting, although they have a right to do so. As creditors typically do not attend the meeting and by law, the bankruptcy judge cannot attend this meeting, this means that the trustee is the only person interviewing the debtor.
You can file a bankruptcy without a lawyer, but it’s not usually recommended as laws can be tough to interpret and understand. Personally, I can’t recommend using an attorney enough. The smallest nuance can end up costing a debtor thousands of dollars or their case could get dismissed without a discharge. I know that hiring an attorney costs a decent amount of money, but like many things in life, you could save yourself a lot of money and time by spending a little more up front.
Even more,don’t start transferring assets to friends and family in anticipation of a bankruptcy unless your attorney told you to do so. People often think they will protect their assets that way, but they are actually exposing their assets that could potentially be exempted by your attorney.
Even though the bankruptcy itself stays on your report for 10 years, the accounts involved in the bankruptcy usually come off the report after 7 years. You will see a boost in your credit score at that time as you will notice more and more new credit card offers coming in your mail. Furthermore, keep in mind that even many years have passed after the bankruptcy, loan applications often ask whether you have ever filed for a bankruptcy, not whether there’s one currently on your credit report.