Due to continued increased costs of living, high medical expenses, and flat wage growth, more and more people today are facing serious personal financial trouble. For many people, it may seem that the only option is to file for bankruptcy. For those that are considering filing for bankruptcy, there are several facts that they should first fully understand before filing.
1- Types of Bankruptcy
When you are looking to file bankruptcy, you should first understand the different types available. Overall, there are two key types of bankruptcy, which are Chapter 7 and Chapter 13. Chapter 7 bankruptcy is often called liquidation bankruptcy as it will require you to liquidate all of your assets to pay off as much of the debt as possible. The balance not paid off will then normally be discharged. Chapter 13 is more of a reorganization in which your debts aren’t discharged completely, but instead you will create a new repayment plan. It is important to understand the differences so you can be sure which type to apply for.
2- Not All Debt is Discharged
When you do decide to file bankruptcy, a lot of different sources of debt will be waived. However, not all debts will be automatically discharged. In most cases, your students loans, back taxes, child support payments, and other similar charges will remain your liabilities without any reduction in past due balance. At times, you may be able to use the declaration to renegotiate with these creditors directly.
3- It Can Be Expensive
While bankruptcy is designed to get you out of debt, the process of filing can be expensive. Most attorneys require you to provide them with a full upfront fee, which can be thousands of dollars. Furthermore, most attorney do not accept credit cards or payment plans, so you will have to have the amount needed in cash in order to pursue filing.
4- You May be Challenged
Once you have decided to file, the process can continue to be a challenge. In most situations, there will be a meeting of creditors to discuss the request. At this point, creditors will have the ability to review all of your personal debts and assets and income and expenses to determine whether you have the ability to repay. This process could lead to a denial of the request, or may require you to create payment plans under Chapter 13 instead.
5- Credit Will Be Affected
One of the most significant ways that your financial life will be impacted is through a reduced credit score, according to Wages & Benham. After filing, your credit score will drop by hundreds of points. Furthermore, the bankruptcy will remain on your report for at least 7 years. This could make it difficult for you to obtain any form of debt, may make it hard to qualify for a lease, and could even be problematic when you apply for a new job.
6- Not All Problems Are Fixed
Most importantly, it is important to understand that not all of your financial problems will be fixed. Most people get into financial trouble by overspending and not living within their means. If this is the case in your situation, bankruptcy will only be a short-term solution. Instead, you need to focus on finding ways to better manage your finances to prevent this from happening in the future.
7- You Can Recover
While bankruptcy can have a long-term impact on your credit report, which could affect you a number of different ways, you can recover fully from bankruptcy over time. The most important thing that you need to do is start reorganizing your financial life. This should include finding ways to earn more income, creating a detailed personalized budget and sticking to it, and finding more ways to save money to achieve personal freedom. Over time, doing this and paying all of your bills on time, will gradually improve your score. Ultimately, once the bankruptcy is removed, your score could improve considerably.
