Before you think about filing for bankruptcy, there are some things that you need to know. Of course, if you are considering bankruptcy, it means that you may be facing debts that you are unable to pay off. Bankruptcy, in most cases, may help to get rid of your debts and release you from some of your financial obligations.
There are three types of bankruptcy options:
- Chapter 7
- Chapter 11
- Chapter 13
Each of these has their own rules and so you must know which one best suits your circumstances. It is in your best interest to first meet with a qualified and experienced bankruptcy attorney to discuss your needs. Most people will usually opt for Chapter 7 or Chapter 13.
Chapter 7 and Chapter 13
With a Chapter 7, you will be allowed to ask for permanent removal of most of the debts that you have previously incurred. Conversely, with a Chapter 13, you will be allowed to ask for a restricted debt repayment plan, which means if you cannot file this type of bankruptcy if you are unemployed. If you earn too much income, you may be unable to file a Chapter 7 bankruptcy.
If you file for Chapter 7 bankruptcy, be sure that you have caught up on payments on your motor vehicles and your home. These are things you want to keep in your possession when you file for bankruptcy.
Identify and list all of the debts that you want to include. These debts will be discharged; whether it is a Chapter 7 or Chapter 13 bankruptcy. Some common debts that may not be discharged are:
- Student loans
- Tax bills incurred 3 years prior to filing
- Child support orders
- Court fines
- Bills incurred prior to filing bankruptcy
Plan how you will pay these non-dischargeable debts. If you file a Chapter 13 bankruptcy, ask your employer to decrease your tax withholding. You will avoid overpayment on your taxes. Avoid getting a tax refund in the midst of a Chapter 13 bankruptcy.
Here are some things that you should never do prior to filing either a Chapter 7 or a Chapter 13 bankruptcy:[badlist]
- Never take out a second mortgage to pay off your debts
- Never withdraw money from your 401K or IRA to pay off your debts
- Never exhaust your credit card balances with the expectation of filing bankruptcy. These creditcard changes may be considered as fraud and may not be discharged
- Never put your home in someone else’s name just to avoid losing your home during the bankruptcy. This would also be considered as fraud
- Never leave any creditor out of the petition. Be sure all of them are listed
- Do not conceal any assets or provide false information.
Here are several things to consider: [checklist]
- Do take this bankruptcy decision very seriously.
- Do follow the advice of your attorney.
- While filing any type of bankruptcy, you should be forthright in all the details that you provide.
- Be as accurate with the information that you offer.
- Do close any bank account that has a credit line or credit card attached to it. This will prevent your account from being frozen.
- Cooperate with your attorney and meet with creditors when required.
- Think about any other alternatives to bankruptcy such as debt consolidation or credit counseling.
One of the reasons that people file bankruptcy is to start afresh and to improve their financial situation. Be mindful that a bankruptcy stays on your credit report for at least ten years and will adversely affect your credit scores. After ten years of filing a Chapter 7 bankruptcy, it will be discharged of all the unsecured debts that you have listed. Filing a Chapter 13 bankruptcy will destroy your credit worthiness for 7 years. If you are in a home foreclosure case, a Chapter 11 bankruptcy can stop the process. If you are unsure which type of bankruptcy to file, your attorney will let you know which assets you are able to keep. Once your bankruptcy is filed, creditors will be unable to contact you. Bankruptcy may not eliminate all of your debts, but many of them will be appropriately restructured.
Marcela De Vivo is a finance and business blogger/adviser, writing on the subject for the past three years. Marcela is also an associate contributor for National Debt Relief.