What is Bankruptcy?
Bankruptcy is a way to get a fresh start by eliminating your debt or by paying back some of your debt over a 3-5 year plan. It is a legal process overseen by Federal Bankruptcy Courts and judges. It’s designed to help individuals and businesses eliminate all or part of their debt or to help them repay a portion of what they owe.
Bankruptcy gives individuals a chance to start over and get a fresh start without the burden of debt hanging over their shoulders.
What are the Different Types of Bankruptcy?
If you decide to move forward with bankruptcy proceedings, you’ll have to decide which type you’ll file: Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Fastest Process:
Chapter 7 is the fastest process. This is the chapter that most people probably think of when they’re considering filing for bankruptcy.
Debts Will Be Discharged:
Under this type of bankruptcy, your debts will be discharged, this means that you will not have to pay any money back to your creditors. A bankruptcy discharge is an order signed by the judge that states your debt is wiped away.
Assets:
Filing for Chapter 7 does not mean you will automatically lose your property, there are different exemptions and it’s best to speak with a lawyer to find out if your property will be safe. In Chapter 7 bankruptcy, you can keep any of your assets or property that is exempt. If an asset is not exempt, you’ll be required to allow a federal court trustee to supervise the sale of assets that aren’t exempt (cars, work-related tools, and basic household furnishings may be exempt). A good bankruptcy lawyer will be able to distinguish which of your assets may/may not be exempt so that the trustee does not sell your assets.
If however, you do have assets that will be sold in Chapter 7 the proceeds from the sale will go towards your creditors. The balance of what you owe is eliminated after the bankruptcy is discharged.
Not All Debts Are Eliminated:
It is important to understand that not all debts are eliminated in Chapter 7. You’ll still have to pay court-ordered alimony and child support, taxes, and student loans.
Consequences of Filing for Chapter 7
Credit Report:
The consequences of a Chapter 7 bankruptcy aside from your debt being discharged is that it stays on your credit report for ten years. This, however, does not mean you will not have credit again or be able to purchase a home. You can have your credit rebuilt to perfect within two years and you can also begin building your credit immediately after the bankruptcy process is over. Individuals are under a misguided impression that when they file for bankruptcy, their credit will be ruined forever. This is not true. Most people who file bankruptcy get credit cards and loans after they receive their bankruptcy discharge.
Owning Property After Bankruptcy:
If you think that filing bankruptcy means you will never own property again, you are wrong. Bankruptcy is a tool to help you rebuild your life and get back on your feet. Individuals who file can own property again after just a few years.
Chapter 13 Bankruptcy
Property Can Be Retained in Exchange for Partial or Complete Repayment of Debt:
Chapter 13 works differently, allowing you to possibly keep your property in exchange for partially or completely repaying your debt. The bankruptcy court and your attorney will negotiate a three- to a five-year repayment plan.
Requirements to File for Chapter 13:
In order to enter this chapter of bankruptcy, you must show the court that you will be able to pay back any arrears plus pay your current payment on a mortgage. Additionally, you will have to show the court that your debts will all be paid off within this time frame. Depending on what’s negotiated, you may agree to repay all or part of your debt during that time period. When you’ve completed the agreed repayment plan, your debt is discharged, even if you only repaid part of the amount you originally owed.
A good bankruptcy lawyer will be able to come up with a plan to help you pay back your creditors. It’s important to note that you must have the income to pay your creditors back. This means that if you are not working or don’t make enough income then a chapter 13 may not be the best option for you. A Chapter 13 bankruptcy will stay on your credit report for seven years and you could file again under this chapter in as little as two years.
How are Chapters 7 and 13 Bankruptcies Similar?
Eliminate Unsecured Debt:
Both types of bankruptcy can help you eliminate unsecured debt (such as credit cards), halt foreclosure or repossession, and stop wage garnishments, utility shut-offs, and debt collection actions.
Stops Creditors from Bothering You:
Both types will also put an end to any harassing creditors calling you or any wage garnishments that may be entered against you. With both types, you’ll be expected to pay your own court costs and attorney fees.
Filing for Bankruptcy: Requirements and Affects
Bankruptcy can be a complex process, and the average person probably isn’t equipped to go through it alone.
Working with a Bankruptcy Attorney
Working with an attorney can help ensure your bankruptcy goes as smoothly as possible and complies with all the applicable rules and regulations governing bankruptcy proceedings. It is important to find someone who specializes in this area of law since it is complex. Many people do not understand that there are different exemptions. A good bankruptcy lawyer will be able to explain the different exemptions to ensure that your property will be safe and not included in the bankruptcy estate.
Requirements to File for Bankruptcy
Before you can file for bankruptcy you will have to meet certain requirements. A good lawyer will be able to ask you questions to determine which bankruptcy, if any, you qualify for. In Chapter 13, you’ll need to demonstrate you can repay your debts and also complete credit counseling with a government-approved credit counselor. While in Chapter 7 you’ll need to demonstrate that you can’t pay your debts and also take the credit counseling course.
Filing Fees
Many people think that filing bankruptcy should be free because they have no money. This is not true, if you want to hire a good bankruptcy lawyer then be exempted to pay money. The fees depending on which chapter you are filing the amount of debt, the amount of property, and how much income you make.
How Filing for Bankruptcy Affects Co-Signers & Married Couples?
Another aspect to note is that your bankruptcy can also affect others financially. For example, if your parents co-signed an auto loan for you, they could still be held responsible for at least some of that debt if you file for bankruptcy.
One thing people who are married get confused is that they think if their spouse files bankruptcy they too will be liable. This is not true unless you have joint accounts. As long as the spouse qualifies then it will not affect the non-filing spouse.
What Debts Are Not Discharged in Bankruptcy?
While bankruptcy can eliminate almost all of your debt, it can’t wipe the slate completely clean if you have certain types of unforgivable debt.
Types of debt that can’t be eliminated include:
- Most student loan debt (although some members of Congress are working to change this).
- Court-ordered alimony.
- Court-ordered child support.
- Reaffirmed debt.
- A federal tax lien for taxes owed to the U.S. government
- Government fines or penalties.
- Court fines and penalties.
Legal Terms To Know
If you are going to file bankruptcy there are some Legal terms that you should know. Here are some of the most common and important ones:
Bankruptcy Trustee
This is an attorney who represents your creditors. This person, appointed by the bankruptcy court reviews the debtor’s petition, liquidates property under Chapter 7 filings, and distributes the proceeds to creditors. He/ she makes sure that you are testifying honestly at the meeting of creditors. He/ she makes sure that your petition is true and correct and you haven’t filed any fraudulent petition.
In Chapter 13 filings, the trustee also oversees the debtor’s repayment plan, receives payments from the debtor, and disburses the money to creditors.
Credit Counseling
Before you’ll be allowed to file for bankruptcy, you’ll need to complete a credit counseling course. This can be done online at your own convenience. There will be two courses that must be completed one before you file and one after. Once you’ve filed, you’ll also be required to complete a course in personal financial management before the bankruptcy can be discharged.
Discharge
When bankruptcy proceedings are complete, the bankruptcy is considered “discharged.” Under Chapter 7, this means that your debt is erased. Further, this occurs after your assets have been sold and creditors paid. Under Chapter 13, it occurs when you’ve completed your repayment plan and paid back all of your creditors.
Exempt Property
Exempt property means that your property is not part of the bankruptcy estate and you will be able to keep that property. If the property is not exempt, then you may be required to sell assets to help repay creditors. There are different exemptions for federal and state law. State law varies on what a debtor may be allowed to keep, but generally, items like work tools, a personal vehicle, or equity in a primary residence may be exempted.
It is important to speak with a bankruptcy lawyer who can really go over your exemptions and determine what property is and isn’t exempt.
Liquidation
This means the selling off of a debtor’s non-exempt property. The sale turns the assets into a “liquid” form — cash — which is then used to pay off your creditors.
Bankruptcy Means Test
The Bankruptcy Code requires people who want to file for bankruptcy to qualify under the means test. Each state has a different median income that must be compared to your household median income. In Chapter 7 bankruptcy, you will have to demonstrate that you do not have the means to repay your debts. This will be shown by looking at your expenses vs your income.
Additionally, the means test averages your last 6 months of income. The test takes into account information such as income, assets, expenses, and unsecured debt. If a debtor fails to pass the means test, their Chapter 7 bankruptcy may either be dismissed or converted into a Chapter 13 proceeding. This will happen when the debtor has enough money left over each month to pay his/her creditor.
Reaffirmation Agreement
A reaffirmation agreement may be used when you file for bankruptcy and want to keep certain assets. Under a Chapter 7 bankruptcy, you may agree to continue paying a debt that could be discharged in the proceedings. Reaffirming the account means that you are going to pay the debt after the discharge. Reaffirming a debt may be good to help rebuild your credit because the payments will be reported to the credit bureaus.
One downfall is that once you sign your reaffirmation agreement you will be held liable for the debt. This means that if you choose to stop paying in the future that creditor can come after you and your bankruptcy will not have any effect on stopping the creditor.
Secured Debt
Secured debt is debt that is backed by property. For example, your mortgage is backed by your home, and for an auto loan, the vehicle itself is the collateral. Creditors of secured debt have the right to seize the collateral if you default on the loan or foreclose on your home if you fail to pay your mortgage
Unsecured Debt
A debt that is not backed by any property. The most common form is credit card debt.
Loan Modification
This is a process within the bankruptcy court that can help you to stop foreclosure proceedings. Loss mitigation and applying for a loan modification can help you put your arrears at the end of the mortgage payment which will allow you to get up to date with your mortgage. Your bankruptcy lawyer and your mortgage company will work together to try to come up with an agreeable plan with the oversight of a bankruptcy judge. 
Automatic Stay
The Automatic stay is implemented when the bankruptcy is filed. This stops any creditors from going after you. Note that if you have filed multiple times you may not have the same protections.
Will Bankruptcy Hurt My Credit Score?
Finally, bankruptcy can damage your credit. However, if you are already in this situation the chances of it having much more of an impact on your credit usually is not significant. More often then not people are already late on payments and already have a low credit score.
It Can Help Increase Your Score
Bankruptcy can actually help you increase your score. To understand this you need to understand how creditors report things to the credit bureaus.
The credit bureaus look at how much debt you have vs your income and then give you a score. With bankruptcy, you may have all of your debt eliminated which means it could increase your credit score. You could have perfect credit within two years of filing.
Type of Bankruptcy Filed and Credit Score
Depending on the type of bankruptcy you file, the information can appear on your credit report for up to 10 years. Discharged accounts will have their status updated to reflect that they’ve been discharged, and this information will also appear on your credit report.
Getting a Credit Card or Loan after Bankruptcy
You Can Get a Credit Card After Bankruptcy Discharge
Usually, after your bankruptcy is discharged creditors will begin sending you credit cards in the mail immediately. Creditors know you have no debt and you want to start rebuilding your credit. You may start with low balances or a secured credit but after a few months, they will increase your score. Many of my clients have fallen into the same pattern and end up filing bankruptcy again so it is important to be careful and take proper steps to maintain good credit practices.
Lenders May Ask for Less Favorable Terms
Lenders right after your bankruptcy discharge may be cautious about giving you additional credit, and they may ask you to accept a higher interest rate or less favorable terms in order to extend your credit. However, as I said previously even if you didn’t file and had bad credit lenders probably would not extend credit to you.
After two years lenders are typically less concerned and will begin giving you credit again. It will be important to begin rebuilding your credit right away, making sure you pay all your bills on time. You’ll also want to be careful not to fall back into any negative habits that contributed to your debt problems in the first place.
Failing to Repay a Debt Negatively Affects Your Credit
Whenever you fail to repay a debt as you originally agreed to, it can negatively affect your credit. Some types of debt relief come with consequences that are more damaging and long-term than others. Before you make any decision about debt relief, it’s important to research your options, get reliable advice from a qualified bankruptcy lawyer, and understand the impact your choices can have on your overall financial well-being.
Don’t just sign up for any debt settlement program or debt negotiation program without speaking with a bankruptcy lawyer first. Many times people end up in the same position they were already in.
Contact Us for More Details
If you are considering filing bankruptcy contact our law office today to speak with an experienced bankruptcy lawyer. We can help you decide if bankruptcy is right for you. Our lawyers have helped many individuals in New York and New Jersey file for bankruptcy. If you don’t know if Chapter 7 or Chapter 13 is the right option for you, our attorneys will work with you to review your situation and advise you on which route to take. We offer payment plans and Free Consultations. You can call us at (973)-979-9078 or Email us at Karra@klkbankruptcylawyer.com
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