Pros and cons of filing for bankruptcy – Forbes Advisor – Forbes Advisor
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Bankruptcy has long had a stigma in the US. People who file for bankruptcy protection are labeled irresponsible, unethical, or lazy. But many Americans face bankruptcy due to an unexpected crisis like losing a job, a medical emergency, or a divorce.
bankruptcy is intended to give debtors a fresh start and relieve creditors. But filing for bankruptcy is a complex decision, and while it may be the best route for some, it’s not ideal for every situation.
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Should You File Bankruptcy?
If you’re saddled with debt you can’t pay back, or your mortgage may be under water and you’ve exhausted all other options, declare bankruptcy can be a wise decision.
Keep in mind that the degree of financial relief you get from bankruptcy depends largely on the type of debt you’re struggling with. Bankruptcy does not relieve child support debts, most back taxes, or other debts arising from legal obligations. And student-loan debt is notoriously difficult to pay off, although the Department of Education recently indicated it is considering whether there should be an option for student-loan borrowers.
A Credit Advisor can help you assess your current financial situation and determine if bankruptcy is the best course of action. Meeting with a credit counselor may be necessary anyway, since anyone filing for bankruptcy must receive credit counseling from a state-licensed agency as part of the process.
You should also consult a bankruptcy attorney about whether to submit a file. A lawyer can advise you on which of your debts can be settled through bankruptcy and whether you should file for bankruptcy Chapter 7 Bankruptcy (known as liquidation bankruptcy) or Chapter 13 bankruptcy (so-called restructuring insolvency).
If you decide to file Chapter 7, you’ll need to prove your eligibility through a means test, which assesses your debt, expenses, and income to determine if you really can’t afford to pay off your debt.
Pros and cons of filing for bankruptcy
- Bankruptcy offers a break from creditors. A key benefit of bankruptcy is that it offers both temporary and permanent relief to creditors. An “automatic stay” prevents them from attempting to collect money from you while the bankruptcy is pending and provides temporary protection from foreclosure, eviction and attachment. Later, when a debt is settled through bankruptcy, collection agencies are no longer allowed to collect it.
- It protects future wages. Wages earned after you file for bankruptcy are not considered “property of the estate,” meaning your future earnings cannot be garnished to repay creditors for settled debts. However, your future wages may still be vulnerable to unpaid debts such as: B. Child support or earnings promised in a Chapter 13 payment plan.
- It can bring emotional relief. Juggling creditors can be exhausting, and financial stress can have a significant impact on your health and family. Bankruptcy can give you some breathing room and a clean slate
- You can keep some assets. Bankruptcy may require you to sell some assets to pay off your debts. But you won’t lose everything because bankruptcy exemption laws protect your home, car, clothing and other valuables up to the dollar amounts listed below.
Federal Bankruptcy Exemptions
- Bankruptcy destroys your credit rating. Your credit score indicates how likely you are to repay debts, so bankruptcy can wreak havoc on your credit score. A bankruptcy stays on your credit report for up to 10 years, but you can start rebuilding your credit immediately. You can start by taking out a secured credit card. If you file for bankruptcy, your credit is likely to be bad, so the blow to your credit score may not be great. If you still have decent credit, alternatives to bankruptcy may be available to you.
- It can get expensive. Bankruptcy Filing Fees range from $313 for Chapter 13 to $338 for Chapter 7. Attorney fees vary but start at $1,300 for Chapter 7 bankruptcy and $3,000 for Chapter 13.
- You may have to give up luxury items. While bankruptcy protects exempt assets like your home and clothes, a Chapter 7 filing requires that any assets that don’t qualify must be sold to pay off your debt. In a Chapter 13 bankruptcy, you can keep your property, but the value of non-exempt luxury goods is used to negotiate a repayment plan with your creditors.
- It’s getting harder to borrow again. A bankruptcy on your credit report will discourage lenders from making loans in the future. You may not be able to get a loan until the judge pays off your debt. If you filed Chapter 7, you must wait two to four years after your discharge before applying for a mortgage.
Alternatives to filing for bankruptcy
Before a non-exempt asset is liquidated as part of a Chapter 7 bankruptcy, you may consider selling it yourself. You could fetch a higher price and use the extra funds to pay down debt.
Negotiate with creditors
It may seem counterintuitive, but you can contact your creditors directly. This option works best early in the process before you get too delinquent, but later you could deal directly with the collection agency. Explain the circumstances and try to reach an agreement that could offer you a lower interest rate, reduced payments, a one-time payout, or a monthly payment plan.
Lenders are often ready to negotiate, as they are likely to get more money back than if you go bankrupt or your account is sent for collection. And debt collectors can negotiate eagerly because they typically bought your debt for pennies on the dollar. Whichever method you end up with, make sure you get your consent in writing. Keep a log of your conversations and detailed records of all payments made to your lenders.
You can negotiate yourself or turn to professionals for assistance. Nonprofit loan advisors can guide you through the process but rely on you to contact your lenders. Debt settlement companies, also known as debt relief agencies, do the talking for you, but they often charge high fees, and not all creditors are willing to work with them. Many encourage you to stop making payments during negotiations, but this can hamper discussions.
Lowering your interest rate could have a big impact on your ability to pay off debt, especially if you’re paying off credit cards or high-interest loans. If you are early in the process and still have fair credit, you may be able to get one Debt Consolidation Loan to lower your interest rates and consolidate your debt into a single payment.
Consider the following scenario, where the borrower has a high-yield car loan and two credit card balances that have been charged increased interest rates due to missed payments:
The above borrower makes at least $695 in debt payments every month. A 72-month debt consolidation personal loan could reduce total monthly expenses by $239 and save more than $4,909 in lifetime interest:
If our borrower continues to pay $695 a month instead of $456, they could be debt-free in just over three years and save about $11,000 in interest.
When consolidating debt, you should avoid secured loan options like a second mortgage or home equity line of credit (HELOC) because loans that use your home as collateral put your home at risk.
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Frequently Asked Questions (FAQs)
Can student loans be replaced by bankruptcy?
Some student loans can be redeemed through regular bankruptcy proceedings, including: loans paid directly to students that exceed the cost of tuition; Loans to students who attend less than half of school; and loans for schools that are not eligible for Federal Title IV student aid. In most cases, however, you’ll also have to prove “undue hardship” – which can be difficult – and file a lawsuit, known as “opponent proceedings”. The US Department of Education is considering a policy change that would make it easier to pay off federal student loans in bankruptcy.
What is the difference between Chapter 7 and Chapter 13?
Chapter 7 bankruptcy is for consumers who have no or low income, and you must prove that you are eligible to file by passing the means test. Many types of debt are completely erased by Chapter 7. Chapter 13 bankruptcy is available to most applicants with a regular income and requires you to agree to a debt repayment plan that typically takes three to five years to complete. After the repayment period has expired, residual debts are often forgiven.
Can I file for bankruptcy if I have already filed for bankruptcy?
If you have filed for bankruptcy and your case is denied, you must wait 181 days before you can file a new application. If you previously filed for Chapter 7 bankruptcy, you cannot file again for eight years. If you applied for Chapter 13, you cannot apply again for six years.