Life After Bankruptcy

Eliminating debt is on the forefront of everyone’s mind these days. There are dozens of different strategies and methods of debt elimination you can try, however only one strikes fear in the hearts of most consumers- bankruptcy. Known as the last resort, the final option, the “worst case scenario”, bankruptcy today is much different than it was a few years ago. No longer having the option to completely wipe the slate clean and start over, more people are thinking twice before filing for bankruptcy. That being said, bankruptcy is in fact the best option for a select number of consumers and contrary to popular belief- there is life after bankruptcy. Before you consider this drastic option, first understand what will happen when you file and what you can anticipate in the years to come.

What Is Bankruptcy?

Bankruptcy is a legal process where the person filing the request declares their inability to repay their debt as it currently stands. The two most common forms of consumer bankruptcy are Chapter 7 and Chapter 13 bankruptcies. When an individual files for a Chapter 7 bankruptcy it is often referred to as a liquidation which basically allows debtors to give up assets that are not exempt. These assets will be sold or returned to creditors in lieu of repayment. In a Chapter 13 bankruptcy, the person filing agrees to restructure their debt in a way that allows them to repay part of all of the debt under new and often longer or more forgiving terms. Your ability to repay your debt today and in the immediate future will determine which type of bankruptcy is right for your situation.

Life After Bankruptcy.

There is no denying the fact that life after bankruptcy can be difficult in terms of personal finance. Lenders will be less inclined to extend credit due to your history of not repaying loans per the original agreement. This poses an increased risk to lenders who are already leery of loaning money in a shaky economy.

When you file for bankruptcy, it will appear on your credit history for at least ten years. In addition to potential problems with lenders, you will also have to honestly answer the question, “have you ever filed for bankruptcy?” which appears on numerous applications for things other than credit. This may impact your chances of getting a job or approved for a number of other things in the future. When and if you qualify for credit in the future, you will undoubtedly see higher interest rates and less favorable terms than your peers who have not filed for bankruptcy.

As you can see, there are many negative consequences associated with filing for bankruptcy. The one positive that makes it worthwhile for qualifying individuals is the prospect of getting back on track financially and finally getting out from under an unbearable amount of debt. If you have exhausted all other options for debt elimination and find yourself in a position where you may never get out of debt without help, bankruptcy may be the best option for your situation. If this is the case, understand that you can repair and rebuild your credit in time. It is a long and often difficult journey, nonetheless, one worth taking if you can avoid the problems that got you in debt in the first place in the future.

The Differences Between Chapter 7 and Chapter 13 Bankruptcies

For many individuals in debt, bankruptcy is the last resource to help get out from under all-too-heavy financial burdens. In the past, bankruptcy was considered to be somewhat of an easy out but today there are much tougher bankruptcy laws and these changes make it more difficult to go through the process of bankruptcy unless you are genuinely qualified.

When dealing with consumer debt, there are two main types of bankruptcies that will be available. Chapter 7 and 13 allow debtors to eliminate most or all of their debts. Consumers may qualify to file for either or both types depending on their financial situation. Let’s take a look at the differences and similarities with Chapter 7 and Chapter 13 bankruptcies.

About Chapter Seven
A Chapter 7 bankruptcy is also known as a liquidation bankruptcy, meaning that a consumer filing for Chapter 7 will have their assets assessed for possible liquidation in order to pay off debts. A trustee will be appointed by a bankruptcy court. Only certain items a person owns can be liquidated for debts. Items such as extra vehicles, second houses and family heirlooms can be sold. Items that can not be liquidated include: your current residence, pensions, clothing, and present household items such as furniture. Once the assets have been sold and the money is put towards existing debts, the remainder of the debts are discharged if eligible and the consumer is no longer required or held responsible for payment. Chapter 7 bankruptcy is a good resolution for those who do not have a foreseeable way out of their debts. While their credit rating will be negatively impacted for 10 years, it does mean that the consumer will have eliminated their debts and will be able to start anew.

About Chapter Thirteen
Unlike Chapter 7 bankruptcy where the consumer can eliminate and have debt discharged after assets are liquidated, Chapter 13 bankruptcy allows you to have your debts restructured in a manner that is more reasonable for you to repay. The debtor must then submit to the court a plan for repayment. The majority of repayment plans last for 3-5 years. In order for the plan to be approved, the debtor must prove that there is sufficient income for the plan tow work and the debtor would reasonably be able to commit to the repayment plan. If the creditors disagree with any of the repayment plan, they are allowed to contest it and ask for different repayment terms. Once plan negotiations have been completed, the bankruptcy court will approve the plan and the creditors can not attempt to collect additional monies from the debtor or change any terms of the plan approved by the court.

One of the reasons people prefer a Chapter 13 bankruptcy over Chapter 7 is because homeowners have a chance to keep homes out of foreclosure. Past due mortgage payments can be included in the repayment plan and allow the homeowner to catch up over time. This may make the home payments even more affordable. On the reverse side of that, if a home is already in foreclosure, filing for Chapter 13 bankruptcy will not enable the homeowner to save it. Missed payments per the terms of the repayment plan can also jeopardize the home’s foreclosure.

For those individuals who want to make the earnest attempt to pay back their debt but can’t do it without the repayment terms, Chapter 13 is the best bet. Filing Chapter 13 also helps to prevent losing assets that people may not wish to part with such as family mementos and other items.

Note About Both Bankruptcy Types
Not all debt can be discharged in a bankruptcy. Some of the debts a debtor has that can not be discharged include: student loans, child support, alimony, damages awarded in a personal injury lawsuit or any income taxes you owe. Regardless of a bankruptcy ruling, these debts will still be the responsibility of the debtor.

Can Bankruptcy Stop Foreclosure?

With so many people struggling with debts and home foreclosures around the nation, many wonder what can be done to stop both the cycle and harassment debt brings as well as save their primary homes from being foreclosed upon. Homes are being foreclosed because homeowners are having more trouble making payments regularly due to job loss or simply having too many debts. When a mortgage note is late or missed too often, the creditor may consider the loan in default and start foreclosure proceedings. When this occurs, the full balance of the mortgage note is due immediately. The mortgage lender will also likely refuse to accept monthly payments from a homeowner.

The Foreclosure Process

Once foreclosure on a house begins, a letter of foreclosure will be mailed and the homeowner will either have to pay the full balance or file bankruptcy so the foreclosure can be stopped. If a homeowner  intends to use bankruptcy to stop foreclosure on a home, they will have to file their bankruptcy case prior to the date of the foreclosure sale.  If you choose to file for Chapter 7 bankruptcy, all of your assets will be placed in the care of a bankruptcy trustee who will decide what can be liquidated and what debts remain will be discharged. Your family home/primary residence can not be liquidated. If you file Chapter 13 bankruptcy, you can continue to make your regular payments on the home while you also use the bankruptcy’s repayment plan to catch up on your past due payments. Bringing your loans current will help save your home.

It is advisable that when facing foreclosure that you contact an attorney who is experienced in bankruptcy law to help guide you through your options. Once you realize you may be having difficulties paying your house note, you should contact your mortgage lender to see what your options are, if any. Bankruptcy should be used as a last resort. It is hard on your credit score and can take a long time to recover from financially. But bankruptcy will help you if you are suffering from extreme financial hardships and unable to continue paying per the terms and conditions of your original credit agreements. Filing bankruptcy should be a last resort to get out of debt. Unless you are in immediate danger of losing your home, you can try other debt management programs to get you back on track.
Consult with your lender about other options available for saving your home from foreclosure before looking at bankruptcy.

Some other options you have for preventing foreclosure are:

• Refinancing
• Modify terms of the existing mortgage
• Renegotiated payment plan
• Give up the homeowners

What Are The Types of Bankruptcy?

For many, bankruptcy is the last option for eliminating overwhelming debt. Because bankruptcy leaves a long lasting (10 years) mark on credit histories and scores, it is only advisable to go into it knowing all of the details and the consequences. It is recommended that you speak to an attorney before going forward with a bankruptcy filing. Understand that bankruptcy will limit your abilities to borrow money or get credit in the future. It should be considered a last resort to debt elimination and should be understood that bankruptcy is not the easy way out of debt. Bankruptcy courts can make the decision as to whether or not you are eligible to file. Again, bankruptcy is a major decision that should not be taking lightly.

There are four basic types of bankruptcy we will discuss here as it relates to personal finance.

Types of Bankruptcy

Chapter 7
This type of bankruptcy is essentially a liquidation bankruptcy, meaning that all non-exempt assets of the debtor are sold in order to repay as much of the debt as possible. Whatever can not be paid through the liquidation will be discharged. Chapter 7 bankruptcy can be used by individuals, partnerships, and corporations. Typically businesses will refrain from filing Chapter 7 because they will no longer be able to conduct business as usual.

Chapter 11
This type of bankruptcy is the most complex of all bankruptcies. Both businesses and individuals can file for this type of bankruptcy, though it is most common for businesses to file. During a Chapter 11 bankruptcy, you continue maintain control of your assets but you will be involved in a reworking of your debts in attempt to pay off creditors in full. In the past, debtors had an unlimited amount of time to repay the debts but after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, debtors must submit a reasonable repayment plan with 120 days or risk having the creditor submit their own plan for repayment to the bankruptcy court.

Chapter 12
This type of bankruptcy is specific for farmers. They can file bankruptcy but retain control of their assets while working through a creditor repayment plan to pay off all debts.

Chapter 13
This bankruptcy is similar to Chapter 11 but it is specific to individuals. The filer will still be in control of their assets but a repayment plan, usually based on a three to five year repayment plan. Portions of the total debt may be discharged but that determination will be based on the debtor’s income. Chapter 13 bankruptcy also places limits on the amount and type of debts that can be involved.