Sometimes life doesn't go according to plan. You might have taken on debt beyond your ability to repay it each month. You may now be wondering how you can get your financial affairs in order.
Individual consumers and small-business owners can learn valuable skills about when to file for bankruptcy. Find out more and decide if bankruptcy is the right move for you.
What is Bankruptcy?
People who are in too much debt can file for bankruptcy. Before requesting their creditors to work with them in resolving their debt, they must sign a federal petition.
What are the Different Types of Bankruptcy
There are many types of bankruptcy that can help people who have too much debt, whether they are consumers or business owners. These are the chapters in the U.S. Bankruptcy Code that you might consider if your debts become too large.
Chapter 7: Individual Liquidation
Chapter 7 is the most common chapter for people filing bankruptcy to discharge personal debts. A trustee is appointed by a federal court to help the individual sell property and repay creditors or lenders. You can claim certain property that is exempt from Chapter 7 bankruptcy. This includes your car, pension, or household equity.
Chapter 11 Reorganization Bankruptcy
To reorganize their assets and debts, small-business owners might be eligible to file for Chapter 11 bankruptcy. An examiner will assist you if the total collection exceeds $5,000,000.
Business owners may find this a useful step because it allows them to keep the company open and functional while a restructuring takes place. If the debtor does not offer it, creditors can propose Chapter 11 bankruptcy.
Chapter 13 - Asset Maintenance and Repayment Plan
Individuals filing Chapter 13 bankruptcy may keep their assets but must pay their debts within three to five years of the court's approval. If you do not miss or skimp on any payments, you won't need to liquidate any assets. The majority of people who are denied bankruptcy approval are unemployed workers with no reliable income.
When to File For Bankruptcy As an Individual
It is important to negotiate with creditors and debtors before you file for bankruptcy. If you can make long-term payments, and eventually pay off your debts more efficiently, they will still get their money.
Sometimes, debtors will negotiate to get out of debt. They may not negotiate if they don’t see a viable way forward based on your financial history and situation.
If negotiating is impossible and you are about to lose your home or other important assets due to the inability to make your monthly payments on time, you may need to file bankruptcy. To get the right certificate for your type of bankruptcy, first schedule credit counseling.
During that session, a counselor will examine your assets and liabilities and help you find the best solution. These experts can be found by contacting federal credit counseling agencies.
It's possible to be worried about your assets or your net worth not being enough to cover your debts. Your senior-most credit card will create a financial plan with your credit counselor to address any remaining debt. If they make the plan in good faith, the minority lenders will agree to any amendments.
When to File For Bankruptcy As a Business
If a debtor refuses to negotiate with small-business owners about their loans, it may be time for them to file bankruptcy. This would typically mean a Chapter 11 case. There are some pros and cons to small-business owners.
This type of bankruptcy may be of benefit to you if creditors or debtors do not meet to discuss new terms. The federal case would instead bring all parties to the table to discuss new options such as extended payment terms for real property, equipment, and manufacturing loans.
Small-business owners don't need to liquidate immediately their businesses or assets in order to pay the debt. They can instead remain operational and open because Chapter 11 prioritizes repayment programs approved by federal courts. After both parties have reached an agreement on terms, a trustee acts as a facilitator to monitor the ongoing payments.
Because it can be expensive and time-consuming, small-business owners are reluctant to file for bankruptcy. You may have to pay $19,738 for filing and attorney fees depending on how quickly debtors agree with payment plans.
You will also need to pay initial payments within the first few months of your plan agreement. This can make it difficult to continue your business operations while paying legal fees.
How to File For Bankruptcy
Filing for bankruptcy involves many steps. Before you make any final decisions, it is important to familiarize yourself first with the process.
1. Check out Your Options
For some people, bankruptcy may not be necessary. While you are looking into consolidation and settlement, it is a good idea to get rid of student loans and unpaid taxes. To make the best decisions, you will need to have your financial history as well as credit report paperwork.
2. Select the Type of Bankruptcy
You can choose Chapters 7, 11, or 13 if bankruptcy is the right option for you or your company. The first step to narrowing down your options is individual or business bankruptcy. Then, you can make a decision based on the value of your assets, current income, and outstanding debt.
3. Find an attorney
The American Bar Association and the state associations have a list of lawyers that can assist you with bankruptcy filings. If you are unable to afford legal aid but still need representation, there are free legal aid clinics.
Going pro se is another name for the option to represent yourself. The best part about going pro se is that you won't need to pay any attorney fees. This will save you a lot of money on filing costs. You may not get the debt relief that you want. Recent research found less than half of pro se cases resulted in debt relief, while 93.9% did.
4. Take a credit counseling course
Anyone filing for bankruptcy will need to take a credit counseling class. This course helps people to weigh all options and decide the best option, whether it's bankruptcy or another type of debt relief. You will need to take the class again closer to your filing date if you have completed your course more than 180 days prior to filing.
5. Completion of your Counseling and Legal Forms
After you have met with credit counselors and completed your course, all forms will need to be filled out. You will need to prepare for the lengthy process of filing for bankruptcy. These forms contain your financial history, statements, and fees as well as other relevant information. If you are interested in representation, your lawyer may be able to assist.
6. Filing Forms and Paying Fees
There are many fees associated with paperwork. You will be charged for filing and administrative work. Surcharges may also apply if you have a trustee who oversees the arrangement with your debtors. These fees can sometimes be waived if the income of the person filing is below 150% of the poverty line as determined by a federal judge.
7. Negotiate with your Creditors
Your creditors will meet with you, regardless of whether you appear in court. They will assess your financial situation and recommend the best way to repay your debts. As the meeting takes place under oath, any agreements reached this point are legally binding.
8. Take Debtor Education Classes
You must complete post-filing education classes if your lenders discharge your debts. Based on your performance in the lessons, this class will ensure that you have a better understanding of how to manage your finances. To complete your bankruptcy, you will need to pay the course fee and receive the final certificate.
How Life After Filing
How will bankruptcy affect your life? It all depends on what bankruptcy filing you make and how your situation is.
After the parties have settled all outstanding debts, Chapter 7 bankruptcy will remain on credit records for a period of ten years. A Chapter 13 bankruptcy, on the other hand, will be removed after seven years.
No matter what type of credit application you make, your credit score will be affected. This could make it harder or even impossible to obtain money from investors and insurance companies if you have to expand your business or deal with an emergency.
You may be required to carry significant debt for many years if you have substantial debts immediately the following bankruptcy. There are limitations on how many people can file bankruptcy chapters.
Debts That Don’t Count Towards Bankruptcy
If you owe money that isn't eligible, you may not have to file for bankruptcy. These are some types of debts federal courts do not consider in bankruptcy filings.
- Outstanding utility bills
- Credit card debt
- Medical bills
- Payday loans
- Past-due rent bills
Contacting legal counsel or credit counselors can help you determine if your debt is eligible for bankruptcy.
When to File for Bankruptcy
Managing your finances is easier if you know when you should file for bankruptcy. You might find it brighter, or it could be a part of your future. Discuss it with an expert to determine if it is the best way for you to manage your debts and still maintain your professional or personal life.