If you’ve been living under a mountain of debt the only thing you may be asking Santa for this Christmas is a clean financial slate. How amazing would it feel to be able to enter into the New Year with a brand new start?
All I Want for Christmas is a Clean Financial Slate
It can feel impossible to decide on declaring bankruptcy. Sure, the bills are piling up, credit card companies are calling, and you have no idea when it comes to figuring out how you’re going to pay your debt. But is it really time to declare bankruptcy?
There are some options that you might want to consider, if you haven’t already yet, and a few questions to ask yourself.
Number one, are you able to reduce your debt or work out a favorable payment plan with your creditors? Many times creditors will work with people that are delinquent on their payments to help negotiate terms so that a debtor can pay their debt. Before you throw bankruptcy into the mix as a potential option, explore alternatives such as credit or financial counseling, negotiating with creditors, credit card consolidation, loan modification, and loan refinancing.
The following indicate a good time for when to seriously consider declaring bankruptcy:
- You’ve been out of work for an extended period of time and you have no unemployment income or savings
- You are delinquent on your taxes
- Your home is nearing foreclosure
- Your wages are being garnished
- You are facing lawsuits for delinquent bills
The decision to declare bankruptcy is different for everyone. Speaking with a professional about your particular situation can help you evaluate your options.
Types of Bankruptcy for Individuals
If you do decide to declare bankruptcy, you should be familiar with the most common types of bankruptcy for individuals: chapter 7 and chapter 13:
- A chapter 7 bankruptcy liquidates all non-exempt assets to pay off the debt you owe to creditors. This is typically considered the best option when you have little income and a large amount of unsecured debt. Unsecured debt includes medical bills and credit cards.
- A chapter 13 bankruptcy reorganizes debt and establishes a repayment plan to pay debt owed to creditors. This is considered the best option for debtors that have income but are needing some breathing room to be able to catch up on outstanding debts.
Chapter 7 Bankruptcy
Filing for Chapter 7 bankruptcy can feel overwhelming, but the process is actually fairly straightforward. As always, it’s advised that you work with a bankruptcy attorney to help guide you through the process.
Chapter 7 Bankruptcy Process
From start to finish the entire Chapter 7 bankruptcy process takes from four to six months, and rarely do cases go to court. It should be noted that the process does require just one mandatory non-court appearance before the trustee. At the end of the process, debtors are able to discharge most or all of their debt.
Steps of a typical Chapter 7 bankruptcy
1. Pre-bankruptcy credit counseling. For a person to be able to file Chapter 7 bankruptcy, they must first receive credit counseling from an approved agency. This needs to happen within the six months prior to filing.
2. Bankruptcy petition. Filing consists filing out some paperwork, including the bankruptcy petition, a schedule that details your financial information, and other forms that are there to help you calculate your income, expenses, and what can be considered exempt. This is where it is helpful to involve a bankruptcy attorney that can explain what needs to be included on these forms.
3. Automatic stay. When a debtor files a bankruptcy petition, an automatic stay goes into effect. This automatic stay prohibits creditors from continuing to collect from a debtor.
4. Assignment of a bankruptcy trustee. A court will assign a bankruptcy trustee to administer the case. This assigned trustee will attempt to maximize assets included in the bankruptcy estate so that the sales of the assets can be distributed to unsecured creditors. The trustee also reviews all the paperwork to check for inaccuracies and any possible fraud.
5. Meeting of creditors. Next, a debtor is required to attend a meeting of creditors hearing that is administered by the bankruptcy trustee. This is not a court hearing, but rather a meeting where a trustee will ask a debtor about his or her petition and finances. Creditors are allowed to appear, although most do not, and are also able to ask questions of the debtor.
6. Decision on Eligibility for Chapter 7. A court will next decide if the debtor is eligible for Chapter 7. A bankruptcy attorney will be able to assess this. One reason a court might deny eligibility of a debtor is because of the results of a means test that evaluates debts owed and income earned.
7. Decision on property. If property is exempt, a debtor keeps it. If there is nonexempt property, the trustee decides next steps. One option is that it is seized and sold to repay creditors. There are a number of exemption options for property, and you’ll want to consult a bankruptcy attorney to review what assets you might be able to exempt in your filing.
8. Determination on Secured debts. Secured are debts that have property that can be used as collateral associated with them. You can often surrender the secured debt to reaffirm the loan or do nothing. Doing nothing means you will need to keep paying back the debt owed.
9. Financial management course. Before a debtor can receive a discharge, he or she must take a debtor’s education course.
10. Discharge. Between three and six months after a debtor file for bankruptcy, the court grants a bankruptcy discharge. At this point, the automatic stay is lifted.
11. Bankruptcy case closed. Once a discharge has been granted, a court closes the case. This usually happens a few days or weeks following the granting of the discharge.
Chapter 13 reorganizes debt so that you are able to pay back debts over the next three to five years. This pay-back plan is called a debt repayment schedule. Based on your income, and how much you owe, you’ll repay 10-100% of the debt you owe. Chapter 13 is a good option for people dealing with the following:
- You have already filed Chapter 7 within the past six years
- You have debts that have co-signers
- You are able to re-pay your debts within three to five years
- Your income has disqualified you from filing for Chapter 7
- You need relief from impending collection proceedings or you want to pay your creditors back but are currently unable to
Pros and Cons of Filing
As with any major decision in your life, there are pros and cons of filing bankruptcy. Below we discuss the advantages and disadvantages of filing for bankruptcy. As always, it’s advised you work with a phoenix chapter 7 bankruptcy lawyer that can help advise you.
Pros of Filing Bankruptcy
One immediate advantage that helps debtors when they file for bankruptcy is the “automatic stay.” This motion alerts creditors that they must stop their efforts to collect money from debtors. This stay is what stops creditors from calling you! Under an automatic stay, creditors are not allowed to call, send collection letters, file lawsuits, garnish wages, or seize assets – except for in specific situations such as the collection of alimony and child support payments.
The biggest “pro” of filing bankruptcy is that a court discharges your debts. That means that certain debts will not need to be repaid. This, of course, is dependent on the form of bankruptcy you file: either chapter 7 or chapter 13.
Cons of Filing Bankruptcy
One “con” of bankruptcy is that while it will discharge most debt, it does not discharge certain debt, such as mortgages, student loans, taxes, alimony, or child support. While student loan debt has been forgiven in extreme cases, for the most part, it is never discharged in bankruptcy. Additionally, a debtor can lose certain nonexempt property in a bankruptcy filing because a court orders it to be sold.
Bankruptcy will also have an effect on your credit score. While your credit might already be low because of delinquent payments, once a bankruptcy is filed, it’s required by the national credit reporting agencies that it appears on your credit report. A chapter 7 bankruptcy will stay on your credit report for 10 years and a chapter 13 will stay for 7 years.
The impact on your credit can hurt your future ability to qualify for a future loan or credit card. It might also affect your ability to be hired or secure living arrangements. Some employers and future landlords evaluate a persons credit score to determine if they are good candidates.
Working with a Bankruptcy Attorney
Bankruptcy can be an overwhelming process. That’s why we advise that you work with a bankruptcy law attorney that is familiar with various debt repayment options. We are committed to helping our clients understand their rights and options under the bankruptcy law and developing the debt relief solution that makes the most sense for each individual. We invite you to call (602) 648-3274 or contact our Arizona office to schedule a free initial consultation.
668 N. 44th St., Ste 320, Phoenix, AZ 85008