Declaring personal bankruptcy is something that you want to know about? Then our guide is here to help you out with this! Do you remember the movie series “The Office?” In that, actor Michael Scott finds himself wallowing in debt, and in a bid to escape his creditors, he is heard saying, “I Declare Bankruptcy!”. However, he soon learned that getting out of debt is not as easy as announcing your financial situation.
Many people helplessly witness their credit card debt go off the roof and imagine it is easy to get a free pass by filing bankruptcy. Though declaring personal bankruptcy is an extreme measure of correcting your financial debts, it should be the last resort for putting your financial house in order.
Such a move can have damaging ramifications on your credit card, and sometimes it is painfully not enough. However, filing bankruptcy can also offer you the opportunity for a financial rebirth. It further allows you to know which creditors take precedence and how much you owe them.
What is Bankruptcy?
Misfortunes may seem to strike you from all corners, with unexpected medical bills, job loss, and of course, the rising cost of living that leaves you hopeless. Your credit card has reached its limit, and your old debts are past due dates; you know bankruptcy is staring at you.
Bankruptcy is a legal process where a couple, individual, or business incapable of repaying their debts can deliver payment under a specific plan or be free of the debt. The debtor often fills a petition in court or, in some instances, a petition filed on behalf of creditors. Your existing personal assets will be evaluated and sold to repay a portion of the outstanding debt.
Filling bankruptcy may offer you or your business a fresh beginning when the debts you cannot pay are forgiven; and also, when your creditors may also receive repayments to a certain degree depending on the assets available for liquidation. After the bankruptcy proceeding, the debtor may be off the hook of the debt obligation he had accrued before filing bankruptcy.
How Bankruptcy Works?
Filling bankruptcy is a complex process that may necessitate consulting a bankruptcy attorney. You can go through the process alone, but consulting an attorney will help ensure the process goes smoothly. Also, it helps in ensuring that the process comply with bankruptcy rules and regulations. The courts will examine if you meet the requirements before filing bankruptcy, such as the inability to repay your debts.
You also must have completed credit counseling with a credit counselor provided by the government. The counselor’s work is to help you examine your finances, create a budget plan, and look for possible options for bankruptcy.
If, after this help, you still want to move on with bankruptcy proceedings, you will need to decide what type of bankruptcy you are filling, either bankruptcy chapter 7 or 13. These bankruptcies can enable you to get rid of unsecured debts like credit cards, stop wage garnishments, halt repossession, and debt collection actions. However, you will still pay the attorney and court costs.
Bankruptcy Chapter 7 in Declaring Personal Bankruptcy
This type of bankruptcy is also called straight bankruptcy and is the most popular form of bankruptcy. Chapter 7 bankruptcy mandate the federal court trustee to oversee the liquidation of any non-exempt assets.
Some of the exempt assets regarded as “reasonably necessary” include personal items, tools of the trade, social security, pensions, part of home equity, and a personal automobile to a certain value. The sale proceeds are then used to offset your creditors, and the debt balance is eliminated after the procedure is complete. Nevertheless, there are certain debts that you will still pay, including taxes, alimony, student loans, and child support.
Chapter 13 Bankruptcy
This bankruptcy allows you to retain your property, but you will be required to partially or completely repay your debts between three to five years. Upon completing the repayment plan as agreed, the debt will be discharged. Chapter 13 bankruptcy has a favorable bearing on your credit score than bankruptcy chapter 7 because it requires part or all payment of the debt owed.
How Filing Bankruptcy Affects Your Credit Score?
Bankruptcy filing gets you a tradeoff that reduces or wipes the debts you can’t pay, but it also informs any potential creditor that you are a credit risk. This history trashes your credit score, lowering your chances of borrowing or spending using a credit card. It will be difficult to get a mortgage, bank loan, or credit card, and it could take up to ten years before the dirt is cleared.
On the positive though, bankruptcy can help you improve your credit score. It helps in a way if, by its time, you already had a low credit score. It means that you will only have bankruptcy as the only negative mark on the score.
Therefore, before you run to filing bankruptcy, know the resulting consequences. All potential lenders will be alarmed by the bankruptcy you filed since this information remains is documented by the credit-rating bureaus.
How to Rebuild Creditworthiness After Bankruptcy?
Bankruptcy is not a financial Armageddon where you never recover from the damage. There are practical steps you can take to improve your credit score and wipe out the bad reputation.
1. Examine Your Credit Report
Familiarizing yourself with your credit report is a perfect place to begin. If you know what contributes to your credit score, you could make necessary improvements to increase the score. You could also identify any inaccurate information that may injure your credit score and correct them.
2. Follow up on Your Credit Score.
Once the bankruptcy proceeding is complete and the debts discharged, you should confirm your score to ensure the changes are affected. Monitoring your credit score will also help you spot anything that could raise red flags; such as identity theft or fraudulent loans applied in your name.
3. Practice Responsible Credit Habits
Some of the practical steps you could implement include making on-time payments after bankruptcy. It is also important to stay on top of your bills as they can contribute to a positive report o your credit score. Additionally, you can also limit your use of credit cards to keep the balances low.
4. Utilize Credit-Builder Loans
The credit builder loan allows the lender to retain money in a secured account in your name. You will then need to make regular monthly payments until the loan and interest are fully paid back. Your bank often reports your repayment history of credit-builder loans to credit bureaus, improving your score over time.
5. Avoid Bankruptcy Fraud
In order to avoid bankruptcy fraud, you can do the following:
- You want to remember that filing bankruptcy is a legal process adjudicated before a judge in a federal court. Giving inaccurate information in an attempt to beat the law can result in dire consequences. Here are some things you should not try doing:
- Hiding assets to avoid forfeiture
- Giving misleading information or incomplete forms
- Filing for bankruptcy several times with real or false information in different jurisdictions
- Trying to bribe an appointed trustee.
These practices of declaring personal bankruptcy can lead to hefty fines or a criminal charge. Also, filling bankruptcy can be dreadful, but it may offer you a lifeline to start a new one; as you put your debt management in order. Before filing bankruptcy, consider available alternatives because bankruptcy ramifications could be dire. It could injure your credit score for a long period, but there are practical things you can do to elevate your credit score to qualify for a loan after bankruptcy.