Bankruptcy Does Not Mean You Lose Everything - What Happens When You File For Bankruptcy?
Bankruptcy Filing Offers Protections
Bankruptcy has long carried a stigma of people being wiped out and losing all of their property and possessions. But contrary to what many think, filing for bankruptcy does not mean that you lose everything. In fact, bankruptcy laws are designed as a legal means to protect certain assets, properties and possessions and allow for a fresh start.
As bills and debts for rent or mortgage, car payments, credit card payments, personal or payday loans add up, it can be overwhelming when you find yourself keeping less and less of the money you make. If this sounds like your situation, you may be a good candidate for filing bankruptcy.
Bankruptcy laws are not meant to put you out on the streets with no possessions as many people think. Bankruptcy laws were written to prevent such a scenario from taking place. Filing for bankruptcy gives you the chance to start over. In some cases, an unexpected life event such as an accident, illness, or job loss, could cause a person's debt to rise above their ability to pay it off. In other cases, perhaps better financial decisions could have been made. Regardless of the reasons, bankruptcy laws exist to give people who are unable to pay their debts relief and a second chance.
It is not an easy thing to realize or admit that you may need to file for bankruptcy. But in many cases bankruptcy can be the best way to turn your situation around and stop living in fear of creditors and debt collectors. For many who don't understand bankruptcy, the thought of filing may not be appealing but when compared to a never ending cycle of debt, it can bring significant relief for people struggling with debt.
Both Chapter 13 Bankruptcy and Chapter 7 Bankruptcy offer protections for assets, personal property, and belongings from creditors and debt collectors.
In a Chapter 13 Bankruptcy the goal is to repay your debts through a repayment plan approved of by the Bankruptcy Court. In this way, you get to keep your assets. In a Chapter 7 Bankruptcy theoretically some of your assets can be sold off to pay your unsecured debts. While Chapter 7 is considered to be a liquidation of assets, in the overwhelming majority of Chapter 7 cases this does not happen.
The Means Test
There is a means test under bankruptcy law that calculates whether your income is low enough so that all of your assets could be considered exempt, meaning they would be protected from having to be sold to pay any debt. This applies to personal property such as clothing, furniture, and household appliances, but may not include items of particularly high value. The test is based on state exemption laws which vary according to the state's median income.
The Automatic Stay
The first and most notable benefit of filing for bankruptcy is that debt relief is immediate.
Once you file for bankruptcy with the Bankruptcy Court, the Automatic Stay legally stops nearly all collection activity that can be taken against you including foreclosures, evictions, and repossessions. Phone calls, letters, and any other communications from creditors will cease immediately.
Do You Need A Lawyer?
If you have a bankruptcy attorney any and all contact regarding your debt and your bankruptcy proceedings must go through your attorney. Under federal law, your creditors may not contact you directly.
For any unsecured debt, meaning there is no collateral, the Automatic Stay remains in effect until the bankruptcy is discharged. This applies to debts such as credit cards, personal loans, medical bills, and even payday loans.
For secured debt, such as loans for homes and cars, the Automatic Stay gives you time to decide what you plan on doing with these assets, this may depend on which type of bankruptcy you file.
Even if you're home is under foreclosure, the Automatic Stay will halt the foreclosure process and allow you to submit a repayment plan for past due amounts.Under Chapter 13, as long as the past due and current mortgage loan payments are made on time and consistently, the foreclosure is not allowed to continue. Chapter 13 Bankruptcy also allows you to do the same with a car if you are behind on your car payments.
You can also choose to surrender your assets and have any related debt discharged, meaning it is eliminated. This occurs under a Chapter 7 Bankruptcy. If you are making car payments, have fallen behind, and owe considerably more than the car is worth, this might be a good option for you especially if you have fallen behind on your payments due to other debts. You do have the option to reaffirm your car loan under Chapter 7, but in most cases you will be responsible for paying back any past due payments, late fees, and interest. In making a decision whether or not to keep your care, you may want to consider the car's mileage, value, and whether it is in need of significant repair.
Bankruptcy and Your Credit Score
Bankruptcy does not mean that your credit is permanently ruined
Filing for bankruptcy also doesn't mean that you will never be able to borrow again. Chances are your credit score had already been lowered by missed payments, collections, and defaulted accounts.
For a Chapter 7 Bankruptcy, after your bankruptcy is discharged, the discharged debts for medical bills, credit cards, and other unsecured debt should start to disappear from your credit report. Also, collection accounts will disappear and any record of the late payments on them will disappear as well. As these debts and collections are removed from your credit report, your credit score will start to rise. It should be noted however that a bankruptcy filing stays on your credit report for 10 years.
But you can use the fresh start of a bankruptcy filing to stay on top of bills and debts. If you can continue to make on-time payments, your credit score will continue to rise and you will be able to take advantage of better interest rates on credit cars, loans, and other forms of credit as needed.
In the case of a Chapter 13 Bankruptcy, the filing remains on your credit report for 7 years from the day you file. The bankruptcy filing may cause your credit score to drop a little if it is still good.
Rebuilding Your Credit
Can I Still Get Credit After I File For Bankruptcy?
Under Chapter 13 Bankruptcy, you are not allowed to borrow or acquire any new debt under the repayment plan unless approved of by the Bankruptcy Court, and only under special circumstances. This lasts until the debt repayment plan is completed and the bankruptcy is discharged. By the end of your repayment period, the bankruptcy will still remain on your credit report but if all payments have been made on time this will help improve your credit score as all of your accounts become current. Filing for Chapter 13 could be especially helpful if you are facing, or already in, foreclosure.
When it comes to Chapter 7, some lenders, often auto lenders, are willing to work with customers during and after their bankruptcy proceedings. The lenders are aware that the customer's debt to income ratio has improved with the discharge of their debt. You would have to pay a higher interest rate but if you can make regular payments on time, your credit score should improve. Often times after one year of consistent on-time payments you could have the opportunity to refinance your car or trade it in and get a better interest rate.
Can All Unsecured Debt Be Discharged?
It should be noted that certain types of unsecured debt cannot be discharged through bankruptcy. For the most part, money owed for back taxes and student loan debt are not dischargeable.
Credit Counseling and Debtor Education
Credit Counseling and Debtor Education Are Required by Bankruptcy Law
The Bankruptcy process exists not only to help you eliminate and restructure debt, but to help you avoid getting back in trouble with debt. That's why it's required that all filers for bankruptcy complete credit counseling and debtor education courses when filing for bankruptcy.
The credit counseling course is required before filing for bankruptcy and the debtor education course should be completed by the time you have your 341 Meeting. The 341 Meeting, also known as the Meeting of the Creditors is a hearing before the trustee overseeing your bankruptcy case. If you have a bankruptcy lawyer, they will be able to recommend a credit counseling agency.
Representation You Can Rely On
Filing for bankruptcy can be a complicated and detailed process, which is why you may want to consider hiring an experienced attorney.
A missed deadline or form, or undisclosed information can delay or even cause your bankruptcy case to be dismissed. An experienced bankruptcy attorney knows the process and the details and will work with you to make sure all of your information is in order so your case can proceed as smoothly as possible.
The Walker Law Firm
The Walker Law Firm works with clients struggling with debt throughout the Greater Dothan, Alabama area and can advise you on whether bankruptcy might be right for you.
If you think you may want file for bankruptcy, we offer a free bankruptcy evaluation where we can discuss your options.
Don't let debt overwhelm your life. If you are considering filing for bankruptcy, Attorney, Clarke Walker has 10 years of experience helping clients in the Dothan AL with their bankruptcy and debt relief needs. He can help you too if you are struggling with overwhelming debt. Contact us today for a free bankruptcy consultation.