If the credit card bills are mounting on your head, you might consider bankruptcy as the restart option. However, bankruptcy has serious credit profile consequences; hence, you must be aware of the basics of the bankruptcy.
Basic 1: Types of bankruptcy
There are two basic types of bankruptcy for individuals, namely:
Chapter 7 Bankruptcy: This type of bankruptcy does away with the credit card or medical debts. There is no limit to this type of bankruptcy. However, fixed debts like mortgages, taxes, child support, and student loans are not wiped away with this type of bankruptcy.
Chapter 13 Bankruptcy: In this type of bankruptcy, the filers undergo a promise to pay back the amount in the period of 3 to 5 years. This option is apt for people who think that they will be able to repay the amount and can hold onto their belongings. However, this type of bankruptcy has the limit of $1 million in case of secured debts and $350,000 in case of unsecured debts.
Basic 2: Who can apply for bankruptcy?
The eligibility for bankruptcy depends upon the type of bankruptcy:
Chapter 7 bankruptcy: The eligibility for this bankruptcy is decided with the help of mean test. This test is a weighing measure of your income versus your repay ability.
Chapter 13 bankruptcy: A similar pattern means test is performed for determining the eligibility.
People who have availed a Chapter 7 discharge in the duration of past 4 years or a Chapter 13 discharge in duration of past 2 years are not eligible for applying for bankruptcy.
Basic 3: Getting started with bankruptcy: The costs
Owing to the complexity of Chapter 7 bankruptcy, it demands the payment of an upfront fee of approximately $1000 to $2000 to the lawyer. Since Chapter 13 involves a plan of several years, the upfront fee cost approximately $2000 to $3000. In either type of bankruptcy, a court filing fee of $300 is applicable. Additional $100 is charged as the counseling session and budget class fees.
If these fees are unaffordable for you, you can reach the nonprofit groups and avail the pro bono-legal services.
Basic 4: What can be kept?
Pensions and retirement accounts under the section 401(k) can be kept safe during bankruptcy. Depending upon the location of your residence, you are allowed to keep limited property as specified under Chapter 7.
You are also allowed exemptions in case of Chapter 13 bankruptcy, however, people mostly hold onto their property by paying back the debt.
Basic 5: The process of Bankruptcy
As soon as you file for either type of bankruptcy, the creditors put up an immediate stay automatically on all phone calls, lawsuits, or letters.
If filing for the Chapter 7 bankruptcy, you will be required to pay the secured debts and the mortgages. Within the span of 20 to 40 days post filing the bankruptcy, the trustee will schedule a meeting where he will go over the financial records. Creditors are then allotted a period of 60 days to object any of the findings, post, which your credit card or medical bill debts will be, wiped off.
Most importantly, only the debts listed by you while filing the bankruptcy are discharged. Any debt incurred by you post filing the bankruptcy is not a part of the proceedings. It takes duration of 4 months approximately for the approval of your bankruptcy.
In case of Chapter 13 bankruptcy, the filer needs to start repaying as soon as the court approves the plan of repayment. During the process of repayment, any application for the new loan is bound to be approved by the trustee.
Basic 6: Learning about repercussions
Bankruptcy brings along serious credit file consequences. Chapter 7 bankruptcy is bound to stay on your credit report for duration of 10 years whereas Chapter 13 bankruptcy is bound to stay of about 7 years. People who are suffering from medical bills rather than the credit card expenses, can except a drop in their points by as much as 100 points. The impact on your score highly depends upon the extent of your debt discharge and the number of the accounts involved.
Bankruptcy is a complicated legal procedure, which might end up trashing away the rating of your credit report. Hence, an in-depth knowledge of the basics of bankruptcy is necessary before filing for the same.