We’re sharing the truth, the whole truth, and nothing but the truth about filing bankruptcy. According to the U.S. Courts, over 900,000 bankruptcy cases were filed between March 2014 and March 2015 (uscourts.gov).

Bankruptcy is one of those words that is often used as a form of judgement. Once the word bankruptcy is mentioned, people begin to make assumptions.  Most people instantly think “wow, his/her financial situation must have been really messed up” or they start thinking of all of the material things (s)he owns and shakes their head. Despite all of the horror stories, there is life after you file for bankruptcy. 

Let’s discuss the truth about filing bankruptcy to help you determine if it may or may not be right for you…

What is bankruptcy?

Bankruptcy is a constitutionally guaranteed right that permits people (and businesses) to ask a court to wipe out all their debts (Garman, Forgue, 2015). Bankruptcy prevents the continued efforts by creditors to collect debts and/or completely eliminates repayment obligations in an attempt to gain a fresh financial start.

Why do people consider bankruptcy?

Most people begin to consider bankruptcy when they feel that their financial situation is completely unmanageable and out of their control. This may be the result of a job loss, expensive medical bills, or anything else that disrupts the flow of income necessary to pay monthly debt obligations.

What’s the difference between chapter 7 and chapter 13 bankruptcy?

Chapter 7

• Chapter 7 bankruptcies are typically straightforward.
• You are required to pass a “means test” which compares your monthly income with expenses in various categories.
• You are also required to receive budget and credit counseling from an approved credit counseling agency within 180 days of your bankruptcy case being filed.
• In a Chapter 7 bankruptcy, most unsecured debts such as credit cards, medical bills and personal loans are discharged. Certain debts, such as federal or state taxes, child support, and student loans may not be discharged.
• Once you enter into chapter 7 bankruptcy, your creditors are informed and you are entered into a temporary period where creditors must stop all action against you.
• If you want to keep your home and/or car, you (or your attorney) have to work out an agreement to repay these debts which is called a “Reaffirmation”.

Chapter 13

• Chapter 13 bankruptcy is also called the “Wage Earner’s Plan” because it is designed for individuals with regular income who might be able to pay some or all of their debts.
• Allows you work out a payment plan with terms as long as five years.
• You get to keep all of your property.
• You must begin making payments within 30 days after filing.
• In order to remain in good standing, you have to consistently make the arranged payments during the allotted time period.

How much debt is enough to declare bankruptcy?

If you file for chapter 7 (see above), you will need to pass a “means test” to ensure you’re unable to meet your debt obligations. If you don’t pass the means test you would still be able to file for chapter 13.

How is my credit affected?

Filing bankruptcy will have a negative effect on your credit and will remain on your credit report for 10 years. Generally, if you’re severely behind on payments before the bankruptcy, your credit score has already been affected. Filing for bankruptcy can reduce your credit score by as much as 200 points. If you manage your personal finances responsibly following bankruptcy, you can slowly increase your credit score even with the bankruptcy still on your report.

Here are a few things to consider before declaring bankruptcy:

• If your debts are secured, such as a home mortgage or a car loan, and you don’t have sufficient income to cover the past due balances and keep up with payments, bankruptcy may not be beneficial for the long run.
• Student loans, back taxes, and child support are a few debts that are not covered by bankruptcy, so if either of these are a big part of your debt, bankruptcy may not work for you.
• Before filing bankruptcy, you should evaluate your overall financial situation to determine if there are alternative options to dealing with your debt.

Do I need an attorney to file bankruptcy?

You are not required to hire an attorney to file for bankruptcy, but it is strongly recommended.

Qualified bankruptcy attorneys are trained to reduce the confusion associated with the bankruptcy process and eliminate mistakes that could affect your legal rights.

How much does bankruptcy cost?

The filing fees are $335 for a chapter 7 and $310 for a chapter 13. The true cost of bankruptcy filings vary, depending on the cost of bankruptcy attorney fees.

Overall, bankruptcy is a very big financial decision that shouldn’t be taken lightly. If you are financially stressed, don’t make a hurried decision to file. Evaluate your situation and seek qualified professional help from a bankruptcy attorney if you do chose to file.

For more information about filing bankruptcy, check out the links below.

Federal Trade Commission

http://www.consumer.ftc.gov/articles/0224-filing-bankruptcy-what-know

United States Courts

http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics

Bankrate Bankruptcy Myths

http://www.bankrate.com/finance/debt/12-bankruptcy-myths–1.aspx

Ashley Narcisse is the founder of Budget Brain Consulting where she focuses on making budgeting easy.

Her mission is to be an asset to the community by providing accurate and quality financial and money management services while maintaining a high level of integrity and adhering to a uniform code of ethics.

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