Bankruptcy could become a great solution for those who don’t see any other way to get rid of debts and financial obligations they are unable to repay. For many, bankruptcy is the “final hope” which brings long-awaited debt relief and a chance to start everything from a blank sheet.
Some chapters allow debtors eliminate their debt burden entirely, while other chapters allow debts reorganization in order to make repayment easier.
Filing for bankruptcy is a long and a very efforts-consuming process. It may bring you several sleepless nights and some stressful situations, but at the end, it will pay off. You will not be left without money for living like many assume. Of course, bankruptcy will lead to some complications and restrictions in social and financial meanings: the information about you going bankrupt will be publicly announced, your credit score will be severely affected and some employers may refuse to hire you. However, bankruptcy is never a catastrophe or an end of life. It is only a specific milestone bringing new life and new opportunities.
After receiving the federal court order, your assets will be withdrawn, sold and distributed among your creditors. Take a note that bankruptcy eliminates not all types of debts. Whatever the chapter you are filing for you will not be able to have your student’s debt, taxes, or child support written off (and some other types of loans as well).
Types of bankruptcy
There are five types of bankruptcy called chapters. Each chapter is designed for the certain financial circumstances. Being a debtor you may apply for the definite chapter and not for another. There are several strict criteria for filing for each chapter.
Chapter 7 bankruptcy is purposed to bring debt relief to individuals with the unsecured debts and low average income. It’s the fastest way to get all your debts written off, but you have to be eligible for filing for this chapter. Read here all requirements debtors have to meet in order to file for Chapter 7.
Chapter 9 bankruptcy is available for cities, towns, counties and other municipalities who face financial and debt struggle. The 9th chapter provides municipalities with the opportunity for debt reorganization. It needs to be said this chapter is a rare one to apply for. Read the detailed description here.
Chapter 11 bankruptcy is a good option for those individuals or business entities who do not qualify for chapter 13 due to the excessive amount of debts. Chapter 11 is very expensive to file for and always requires a participation of a professional lawyer.
Chapter 13 bankruptcy is also called a repayment plan. It allows a debtor reorganize loans to make monthly loans payments smaller. It must be said that not only federal court approves this chapter but also the creditors of the individual. Usually, if the debtor does not qualify for chapter 7, they file for the 13th chapter which brings way less amount of negative consequences. The person does not go bankrupt and still own their assets.
This chapter means almost the same as chapter 13 with the only difference that your debts must be a result of your family business – either farm or a fishery (which makes this chapter not so popular comparing to chapters 7 and 13). Chapter 12 implies high debt ceiling.
What are the steps of filing for bankruptcy?
- First of all, you need to figure out what type of bankruptcy suits your situation. Every chapter has such criteria like the debt ceiling (the maximum amount of the debt), average income, etc. Let’s say you decide to file for the Chapter 7 (the most common one for individuals).
- Find out which of your assets are exempt (which will not be withdrawn by the Trustee in order to sell it).
Other assets (if any) like your house, a car (only an expensive one) will be sold and the money distributed among creditors.
- Decide whether you are going to hire a special bankruptcy attorney or file for bankruptcy without professional help. Attorney’s services cost money but professional help increases your chances for bankruptcy approval dramatically.
- Find out what bankruptcy court is related to your district (it’s important to send all papers to the court which belongs exactly to your bankruptcy district).
- Now it’s time to make calculations in order to find out whether you qualify for Chapter 7 or you will have to apply for chapter 13. Go to the U.S court website and find the form 22A-1. This form will help you with your median income calculations. If it turns out you do not qualify – download the form 22A-2 and repeat calculations. Then, download and fill in the form 22A-1Supp.
- Download the form where you will list all your debts to be written off. Take a look at the list of exceptions (the type of debts that cannot be discharged under any circumstances). If occasionally you will forget to list any of your debts, you will still have obligations on it even after the bankruptcy is approved.
- After the forms are filled in and sent to U.S. court, you will be given your personal bankruptcy Trustee who will manage all related processes (like assets selling and negotiation with creditors).
- Right before the court’s approval, you will have to attend the “341 meeting”. This is a formal meeting with creditors where you’ll be asked several questions. It is strongly advised to prepare for this meeting with a lawyer, as the outcome of the meeting may play a key role in the court’s decision.
What is the aftermath?
Here is a very important nuance: if you have a cosigner for one of your loans, the cosigner will still be obliged to repay your loan even if your bankruptcy is approved by the court. That means that only you personally as a debtor receive the debt relief.
The consequences of going bankrupt are significant but not catastrophic. First of all, the fact you are bankrupt will go public and this may affect your relationships with potential employers.
Your credit score will be lowered to almost the zero level and you may not qualify for bank loans for several following years. The information about your bankruptcy will remain in credit reports up to 10 years.
Anyway, all consequences are bearable, especially taking into account you are free of the psychological and financial burden of debts.