In 2020, more than 544,000 people filed for bankruptcy; this figure is significantly lower than the 750,000+ cases in the previous years. If you are considering bankruptcy, you first need to look at your finances.
Is there any other way you can get out of debt? Perhaps selling valuables that don’t hold any importance could pay down half of the loans, giving you plenty of time to devise a plan.
Filing for bankruptcy should always be the last option. If you have made up your mind, you need to gather the necessary documents. It's important to remember you need to meet certain requirements before submitting your bankruptcy application.
You need to prove you don’t have sufficient funds to repay the debts and that you are willing to sign up for credit counseling to ensure you don’t fall into the same problem in the future. A government-approved credit counselor will assess your finances, discuss possible alternatives and then assist you in creating a personal budget.
The Impact of Bankruptcy
Bankruptcy mostly impacts your financial credibility. The case will remain in your credit report for ten years, after which a credit reporting agency is not allowed to report it when you apply for a loan.
In these years, you must work hard to improve your credit score. Any history you have will be invalid, and most lenders will refuse to give you credit based on it.
You won’t be able to open an account, and even if you get approved for a loan, the interest rate will be too high and the repayment period small. The two most common types of bankruptcies people usually file for are Chapter 7 and Chapter 13.
Chapter 7 – Straight Bankruptcy
All your assets are put up for sale, including your house, cars, jewelry, and any other valuables. A federal court trustee supervises the sale, and the money goes directly to the creditors.
Chapter 13 – Wage Earner’s Plan
Chapter 13 is a more favorable bankruptcy option. Your attorney and the bankruptcy court work together to develop a 3 to 5 years repayment plan.
Once you have completed the repayment plan, your debt is discharged, even if you paid half the debt. One of the best things about this repayment plan is that you get to save some of your assets.
Debts That Don’t Go Away Even After Filing for Bankruptcy
Under three years old income tax debt.
Debts you didn’t mention in the applications.
Debts incurred fraudulently.
Taxes (Not including income tax).
Alimony or unpaid child support.
Federal tax liens.
Fines and penalties by government agencies.
Medical bills of personal injury caused while driving intoxicated.
Homeowner’s Association fees.
Court fines, including criminal restitution.
The Aftermath of Bankruptcy
Bankruptcy turns your financial life upside-down. Not only do you have to start from scratch to build your credit score but based on the bankruptcy type you chose, you might lose the roof over your head and your car. You should always assess your financial situation and make a budget before applying for a loan because your retirement depends on it!