What is Bankruptcy?
Bankruptcy is a court proceeding in which a judge and court trustee examine the assets and liabilities of individuals and businesses who can’t pay their bills and decide whether to discharge those debts so they are no longer legally required to pay them.
Bankruptcy laws were written to give people whose finances collapsed, a chance to start over. Whether it was bad decision-making or bad luck, lawmakers could see that in a capitalistic economy, consumers and businesses who failed, need a second chance.
Why would I want to file a Bankruptcy?
The primary reason for declaring bankruptcy is to start all over again with a clean slate.
However, there is a secondary reason for filing that might ease some of the tension related to your problems. Declaring bankruptcy will stop the badgering phone calls, letters and other attempts to contact and collect from you.
Legally, it’s referred to as “the automatic stay.” It means that creditors are prohibited from filing a lawsuit against you or entering liens against your property or constantly contacting you in an effort to get a payment on the debt. It also stops things like eviction, utility disconnection and wage garnishments.
Bankruptcy is a long situation. Once you have filed, the process usually takes six months or more to complete. Before, and during that time, you and possibly your friends or workplace, have received phone calls from debt collection agencies trying to settle your accounts. Those calls must stop as soon as you declare bankruptcy.
Impact of a Bankruptcy
The overriding principle of bankruptcy is that it gives you a fresh start with your finances. Chapter 7 (known as liquidation), wipes away debt by selling nearly all your possessions. Chapter 13 (known as the wage earner’s plan) gives you an opportunity to develop a 3-5 year plan to repay all your debt and keep what you have.
Both equal a fresh start.
Yes, filing for bankruptcy impacts your credit score. Bankruptcy remains on your credit report for 7-10 years, depending upon which chapter of bankruptcy you file under. For example, Chapter 7 (the most common) is on your credit report for 10 years, while a Chapter 13 filing (second most common) is there for seven years.
During this time, a bankruptcy discharge could prevent you from obtaining new lines of credit and may even cause problems when you apply for jobs.
Here are just a couple of the other areas bankruptcy can touch:
Private life. Filing for bankruptcy means your name goes public. It’s not going to appear on a billboard downtown, but it could appear in the legal notices of your local newspaper or read over local radio or TV stations that broadcast legal notices. It also is available to anyone with a PACER (Public Access to Court Electronic Records) account. The mandatory meeting with creditors occurs in a public forum and it appears on your credit report, for whomever has access to that.
Co-signers. These are people who sign their name to a loan, saying they will pay if the person receiving the loan does not. In Chapter 7 bankruptcy, the co-signer is on the hook. Creditors can go after him/her for payments, even if your bankruptcy case is discharged (successful). Chapter 13 is a different story. The protective “stay” that prevents creditors from pursing payments once you file for Chapter 13, extends to the co-signers. That stay remains in effect as long as you make regular payments on your Chapter 13 agreement.
If you are considering bankruptcy, your credit report and credit score probably are damaged already. Your credit report may not endure significantly more damage, especially if you consistently pay your bills after declaring bankruptcy.
Still, because of the long-term effects of bankruptcy, some experts believe it’s most beneficial when you have more than $15,000 in debts.
When should a Bankruptcy be filed?
There is no “perfect” time, but there is a good rule of thumb to keep in mind when you’re asking yourself the question: should I file for bankruptcy? If it is going to take more than five years for you to pay off all your debts, it might be time to declare bankruptcy.
The thinking behind this is that the bankruptcy code was set up to give people a second chance, not to punish them. If some combination of mortgage debt, credit card debt, medical bills and student loans has devastated you financially and you don’t see that picture changing, bankruptcy might be the best answer.
How do I file?
If you've decided to file for bankruptcy, your first step should be to consult an attorney. While it is possible to file without one, "seeking the advice of a qualified attorney is strongly recommended because bankruptcy has long-term financial and legal outcomes," the Administrative Office of the U.S. Courts notes on its website. (Bankruptcy is governed by federal law, and cases are handled by federal bankruptcy courts, although some rules differ from state to state.)
With over 20 years of experience filing bankruptcies in the state of Michigan, VP Law, PLLC has the legal knowledge, experience and resources to guide you to make the best financial decision for you and your family.