Some common questions we hear when it comes to bankruptcy:
Q: First, what exactly is bankruptcy?
A: Bankruptcy is a federal procedure that was designed to give Americans a financial fresh start when debt threatened to erode their security. It is a process by which you can “catch up,” either through discharging certain eligible debts or by creating a repayment plan. It also prevents creditors from contacting you, which can relieve untold stress. The ringing of your phone doesn’t trigger anxiety after you file.
- What types of personal bankruptcy are available?
- For individuals, there are two main types - or chapters - of bankruptcy:
- Chapter 7 Bankruptcy: Liquidation. Chapter 7 proceedings are for individuals (or businesses) who do not have the ability to repay their debts now or in the future. Non-exempt assets, such as cars, valuable collections, cash, certain bank accounts (but not retirement accounts), second vehicles, second homes, and in some cases, primary homes, are sold by the court-appointed trustee in order to repay debts. The benefit here is that most debt can be discharged, excluding child/spousal support, many student loans, and most tax debt.
- Chapter 13 Bankruptcy: Reorganization. Reorganization is much different: you can reorganize your debt and create a payment schedule. Typically, this must be done over three to five years. After that point, eligible debts are discharged.
Q: What is an automatic stay?
A: When you file for bankruptcy, the court issues an automatic stay. This means that creditors cannot attempt to contact you regarding your debts or make any attempts at collection. Again, this is a tremendous relief to people who are in financial crisis.
Q: Will I lose my house?
A: With Chapter 13, you will not lose your house if you are able to create a repayment plan that is accepted by the court. With an automatic stay, your foreclosure proceedings will halt. As long as you pay arrears and stay current with your mortgage, the lender cannot foreclose. With Chapter 7, you may lose your home.
Q: Can I choose between Chapter 7 and Chapter 13?
A: Maybe. If your income is higher than the median average for a family of your size and you would be able to repay some of your unsecured debt (e.g. credit cards, medical bills) within five years, you cannot claim Chapter 7. For Chapter 13, you must not exceed a certain level of debt.
If you do have a choice, many opt for Chapter 7 to discharge debts and get the process over with faster. If you have a higher income and more assets, Chapter 13 is often the better option.
Q: Will anyone know I filed for bankruptcy?
A: Technically, bankruptcy records are public. To access them, though, one must register and pay a fee to use the PACER (Public Access to Court Electronic Records) system. Certain employers may inquire as to whether you have ever filed, as well.
Q: Will bankruptcy affect my credit?
A: Yes, it will. Bankruptcy does help you discharge or pay off debts, but these accounts still remain on your credit report. This will impact your score for seven (Chapter 13) to ten years (Chapter 7). There will be a drop, and it may be significant. However, if you start practicing good financial habits, you can work on increasing it and becoming a “good risk” for lenders. This, in turn, will help you get more favorable terms when you do apply for a loan or other credit.
Q: What should I do?
A: This is a highly personal decision, and the best route depends on your specific circumstances. It is best to pursue alternative methods to repay debt, such as consolidation, renegotiating terms, or seeking financial counseling. If these do not work or are not feasible, bankruptcy may be the only option left.
What you can, and should, do is seek the advice of an experienced bankruptcy lawyer. We are here to guide you through the information, answer your questions, and determine the best next steps for you.
These are just some of the questions that may be on your mind. You can see an additional list of frequently asked questions about bankruptcy here. Do not hesitate to contact the Law Firm of Robert P. Laney to learn more, explore your options, and begin to regain your financial security. Remember, there is hope, and there is help. Reach out to our team today.