Published in: Banks | April 30, 2019
5 Things You Should Know About Filing for Bankruptcy
By: Maurie Backman
Filing for bankruptcy might seem like a good idea, but before you go that route, be sure to understand the repercussions.
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When you're drowning in debt and can't so much as keep track of the bills piling up, filing for bankruptcy might seem like a good choice. And in some cases, it is. But depending on your circumstances, filing for bankruptcy is a move you might end up regretting. With that in mind, here are five important things you need to know about the process.
1. There's more than one type of bankruptcy
Individuals who file for bankruptcy can pursue two different types: Chapter 7 and Chapter 13.
Chapter 7 is effectively a liquidation of your assets, which are sold to repay your existing debts to the greatest extent possible. Chapter 13, meanwhile, is more of a reorganization of your personal debts. Under Chapter 13, you're required to abide by a payment plan of sorts that allows you to retain your assets while paying off your various obligations.
Generally speaking, it's harder to qualify for Chapter 7 than it is to file Chapter 13. That's because with Chapter 7, you must submit to something called the "means test" and prove that your income is low enough to make you eligible. In a nutshell, your monthly income must be less than the median income for a household of your size in your state to pursue a Chapter 7 filing.
2. It's not a quick process
You might assume that once you file for bankruptcy, all you need to do is fill out some paperwork, file said documents with a court, and call it a day. Not so. The Chapter 7 process can easily take six months to complete, while Chapter 13 can take even longer. Be prepared for a fairly drawn-out -- and potentially stressful -- process if you decide to file for bankruptcy.
3. It can be expensive
The fact that it costs so much money to file for bankruptcy is ironic. After all, if you had money, you'd have an easier time paying your debts, thereby negating the need to file for bankruptcy in the first place. But make no mistake about it: The cost of filing for bankruptcy is substantial. You'll face court fees, filing fees, and attorney fees, which can amount to many thousands of dollars. And if you're thinking you'll just skip the lawyer and file for bankruptcy on your own, good luck with that. Bankruptcy is a complex process, and it's not something most folks are equipped to handle solo.
4. It can stay on your record for a long time
Though filing for bankruptcy does, to an extent, help you wash your hands of your debt, don't assume that once the process is complete, you'll have a clean financial slate. A Chapter 13 bankruptcy filing will stay on your record for seven years, while a Chapter 7 will remain there for 10 years. As such, you may have a hard time borrowing money in the years following your bankruptcy.
The good news is that you can take steps to build your credit despite that black mark on your record. If you pay all your bills on time and avoid over-borrowing, then slowly but surely, your credit score should come back up. But expect it to take some time for that to happen.
5. It won't help you get rid of your student loans
If your desire to file for bankruptcy largely stems from a seemingly endless pile of student loans you racked up in college, here's some bad news: Student debt is not dischargeable in bankruptcy. If your goal is to get out of paying your educational debt, you'll need to come up with a different plan.
There are ways to make repaying student loans more manageable, especially if you took out federal loans. For one thing, you can apply for an income-based repayment plan, which might lower your monthly payments. You can also look into deferring your payments until your financial picture improves. If you borrowed privately for college, your options may be more limited, but you can still attempt to negotiate with your lender or refinance your student debt to make it more manageable.
Filing for bankruptcy is the right move in some circumstances. Just know what you're getting into before going that route, especially since the process is probably more costly and cumbersome than you might expect.
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