Filing for bankruptcy is a sobering reality and finalizing that decision is not easy. If you’re in the position of wondering whether you should do it and what might happen if you do declare bankruptcy, you probably want some concrete answers about what the process is like and how it will affect your finances in the future. Even if you’re not in a dire position now, you may be curious about these answers. So below we’ll take a look and outline what you can expect.
One quick note: if you’re seriously considering this path, try talking to a bankruptcy attorney to get specific answers regarding your situation – many bankruptcy lawyers offer initial consultations for free to help you evaluate your options. With that said, here are a few questions you need to answer before declaring bankruptcy.
What kind of bankruptcy are you looking at?
There are three different types of chapters you can file when declaring bankruptcy. It’s important you understand how each one works, so you can pick the right one for your situation, and the one you’re most comfortable with.
Chapter 7 is the most common type of bankruptcy but affects individuals differently than a business. If you own a business, it will be discharged of all debts but the assets will be liquidated to pay your creditors. As an individual you will likewise be discharged of all debts, but you won’t have to liquidate your assets, if you meet certain qualifications.
Chapter 11 is better suited for businesses that want to keep operating, a sort of “wiping the slate clean.” This chapter buys time for both you as an individual or a businesses, if you want to continue controlling your assets while trying to regain control of your finances. Once an agreement has been made with the creditors, you can work out a payment plan to repay your debts within a certain timeframe.
Chapter 13 is more effective if you have regular income and want to maintain ownership of your assets, with the stipulation that you pay some of your future income to your creditors. Normally you are not discharged of your debts until your debt payments have been completed. The repayment time and amount are calculated based on different factors:
- Value of equity in your assets
- Overall income and expenses
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Your finances will be made public
Before you can be approved for any type of bankruptcy filing, you’ll be forced to disclose all of your personal and financial information. If you own a business, you’ll need to share all of your financial statements and other accounting information.
All of your debts, income and assets will be made public (since they are recorded in the court documents that are filed with the state). So be prepared for this outcome before filing for bankruptcy.
How does bankruptcy impact your credit score?
Once a bankruptcy filing has been completed, it will remain on your credit report for 10 years. But you can start getting approved for new credit well before that time. It all depends on your overall financial habits, including; current income, debt-to-income ratio and how well you’ve been able to pay your debts since you filed.
Aside from that, exactly how your credit score will be affected depends on your personal credit history. But generally having a bankruptcy filing on report is a very big negative.
For example, if you’ve had nearly perfect credit in the past, you’re likely to see a big drop in your credit score number. But if you’ve had spotty credit in the past, your overall score will be minimally affected. The amount of accounts you have when filing will also affect your credit profile differently.
Additionally, you’ll be required to disclose the fact that you filed for bankruptcy for the rest of your life — even if you’re a millionaire who’s made timely payments for the past 15 years. If you fill out any type of form (like employment) you’ll have to check the box that says “filed for bankruptcy”.
Strive to change your financial habits
Before you can declare bankruptcy, you are required to apply for credit counseling from a government-approved organization within 180 days before filing. You will likely be required to complete debt education courses before all your debts can be written off.
Filing for bankruptcy is serious, so you need to take all the necessary steps to change your financial habits. Once you’ve gone through the bankruptcy process, you don’t want to end up back in that situation again. It’s important to learn from your mistakes and change your financial behavior going forward.
Bankruptcy should be looked at as a wake-up call, not a tool you can use as a back-up plan if you fail. Take it as a warning that you need to find support, create a plan and get yourself back on your feet.
Join local organizations or communities
If you find that bankruptcy is the best answer for your situation, don’t feel discouraged. Sometimes this is the kind of fresh start you need to turn your finances around for the better.
There are thousands of other people and businesses that have gone through bankruptcy too, so don’t be afraid to seek them out for support.
Whether it’s a local non-profit debt counseling agency or an online community, having an encouraging group of people around you can help ensure you don’t repeat past mistakes. You can also look to these organizations to help you find a new job and start rebuilding your credit. Filing for bankruptcy isn’t the end of the world and you don’t have to face it alone!
If you want to pay off your debt without filing for bankruptcy, consider signing up for ReadyForZero, a free tool that can help you organize all your credit accounts in one place make a plan to get out of debt.
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