What Is Bankruptcy and How It Works

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So, you are planning to file a bankruptcy. You want to know the entire process so that you can plan the next step without any confusion. In this article, we will try to answer all your queries. You will know what bankruptcy is. Besides, we will cover all the aspects that include legal requirements, obligations, and the outcome. You will know when the bankruptcy is not the right option and which type you should consider when planning to file one.

What is Bankruptcy?

Bankruptcy is a federal legal process. The process is designed to help individuals, companies, and institutions to start their finance fresh. It can come to the rescue of all those businesses and individuals who are going through a difficult time after a huge loss. The key objective of the bankruptcy is to enable you to be freed from all your financial obligations. However, the outcome will affect your future finance.

People normally believe that bankruptcy is a complex process. They think that the court will take full control of their assets and they will be left with nothing. However, the reality is different. A bankruptcy case will be ended with a discharge order. A discharge means the court will prohibit all the creditors to harass you to repay their debts.

What is Discharge?

Discharge is a legal order that will be issued by the court to help you to deal with a financial crisis. You can say that discharge is the outcome of the bankruptcy cases. A discharge is also known as the bankruptcy injection. A discharge order will permanently prohibit lenders to ask you to repay their debts. Though a discharge is considered permanent, it will not be all-inclusive. It is noteworthy that all your debts will not be dischargeable. You might need to repay some debts even if the decision goes in your favor.

Some debts that will not be dischargeable are most tax debts, spousal support, and child support. All these financial supports will not be discharged. But yes, a major portion of your debts will be discharged even if it does not include the above-mentioned conditions.

How Does the Bankruptcy System Work?

The bankruptcy system is outlined in the United States Bankruptcy Code. It is operated by the United States Bankruptcy Courts. These courts act as the subunit of the United States federal district court system. So, there will be a bankruptcy court for each federal district in the United States. Also, there might be multiple courthouses when the population is more in one district. You can find many courthouses in some cities.

The bankruptcy courts in each district are supervised by the bankruptcy judges. The judges of the bankruptcy courts are appointed for the period of the fourteen years. They are appointed by the federal judicial committees.

What Are the Legal Requirements to Declare Bankruptcy?

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Businesses and individuals can file bankruptcy when they have more debts than their financial status to repay it. If they feel that they do not have the desired income source to repay their debts sometime in the future, they can file a bankruptcy case to prohibit lenders to harass them for debts. In the current condition, people, not the businesses, are coming forward to file a bankruptcy case to deal with a financial crisis. When they find it hard to repay an auto loan, student loan, and even a mortgage, they go for this option.

Most of these people are not wealthy. They belong to the median income category and take more loans than their repay status. The result is obvious. They cannot make timely payment and the financial instability leave them with no other option except filing a bankruptcy case. You can file for bankruptcy when the loan is between $500 and $3,500.

When Should You File a Bankruptcy?

There is no thumb rule about the perfect time to file a bankruptcy. Though the bankruptcy declaration can give you some peace, it will affect your future more than one way. So, make sure that you are planning for this as the last option when you find other solutions are not effective to improve your financial status in the near future. If you feel that it will take more than a half-decade and more to repay your debts, you can consider declaring bankruptcy.

If you have more than one loan that includes credit card debt, mortgage debt, student loans, and medical bills, then bankruptcy can be the right answer to your condition. Even if you do not qualify for bankruptcy, you can consider a debt settlement or debt management program. Both these options can offer you some relief when you need it most.

What Are the Benefits of Declaring Bankruptcy?

The key benefit is that you can start fresh again without bothering about your prior loans. All the mental trauma and financial burden will be eliminated. There is no doubt that you will have to face some difficulties due to your poor credit score. However, your present will be stress-free and you will not be haunted by lenders anymore. Once you declare the bankruptcy, the badgering phone calls and other contact attempts will be stopped immediately. The bankruptcy law will prohibit creditors to bother you or file a lawsuit against you. Besides, it will stop many other things including utility disconnection, wage garnishments, and eviction. However, the process might take about six months to show the result.

During this period, you cannot stop lenders to make calls to you, your workplace, your family, or colleagues. Once you declare the bankruptcy, all the attempts must stop immediately.

How Much Will You Have to Spend?

Bankruptcy is a legal process. There are also different types of bankruptcy. Filling the bankruptcy is the first step. If you file on your own without hiring an attorney, then you will not have to spend on attorneys. However, it is always suggested to hire an attorney. These legal professionals understand the legal process as well as complexities. They will offer you all the legal help related to your case. Also, they will make you understand where you stand in the entire process.

If you hire an attorney, you will have to pay the filing fee and the attorney fee. If you file without an attorney, you will have to pay only the filing fees. As there are different types of bankruptcy, the fee will vary depending on the type. The average cost for the filing will be between $300 and $350.

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How to File Bankruptcy

The process is a bit complex. Needless to mention, you will have to understand the entire process before going ahead with your decision. The process will include all your financial records such as your income, debts, assets, and your expenses. Next, you will have to receive credit counseling. You will have to receive it within 180 days before you file the case. You will have to get counseling from an authorized or approved provider. You will get the list of the approved provider on the website of the United States Court. You can get the counseling services online or even over the phone.

Counseling is important since the court wants to ensure that you have tried all the possible options to deal with your financial crisis. Once you complete the counseling, you will receive a certificate and you need to submit it while filing the bankruptcy case.

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Get the counseling completion certificate and then submit it with your application. If you fail to do so, your filing will not be accepted. You will get the rejection on this ground only. This is obligatory. With this certificate, you can file your bankruptcy case. However, if you find the process complicated, you can consider hiring a bankruptcy attorney. Find the one who has the experience of fighting such a case with a winning record. You will have to fill many forms depending on the type of bankruptcy. You might find it hard to fill all accurately and this is going to affect the outcome.

You will have to answer the questions of trustees and go through many legal complications. You can make it easier by hiring a bankruptcy attorney. When your budget does not allow it, consider utilizing all the legal services available for free.

What Are the Types of Bankruptcy?

There are six types of bankruptcy. The types are known as the chapters. There are Chapter 7, Chapter 13, Chapter 11, Chapter 9, Chapter 12, and Chapter 15. Among all these types, Chapter 7 and Chapter 13 are more common types of bankruptcy. Chapter 7 is suitable for all who do not have a regular income source and do not want to use Chapter 13.

Chapter 13 is normally used when one has a regular income source and can repay a portion of debt within a period of 3 to 5 years. Chapter 9 and 11 are complex. When Chapter 11 is designed to reorganize the complex debt structures, Chapter 9 is appropriate for municipalities and political subdivisions including airport, hospital, school districts, and utility. Chapter 12 is ideal for fishermen and families and Chapter 15 is designed for foreign debtors.

How Long the Entire Process Will Take?

The process will vary from six months to years depending on the type of bankruptcy. Chapter 7 process is brief compared to other types. It will take from four to six months to receive the discharge order from the court. However, Chapter 13 is a lengthy process. It will take three to five years. The monthly payment plan will be decided depending on your income status. Chapter 13 will reorganize debt and will enable you to pay according to your income status. However, you will have to pass several tests to get approval from the bankruptcy court.

It is important to understand the tests so that you can decide your eligibility status. You should not misinterpret your financial status while filing a bankruptcy case.

How Do Bankruptcy Trustees Work?

In most cases, a trustee will be appointed automatically once you file a case. The trustee will review the documents and will decide depending on the type of bankruptcy. For Chapter 7, the trustee will sell your non-exempt property to make payments to your creditors. The trustee will check all the possibilities of the fraud. 

For Chapter 13, the trustee act as the key point of contact. They will review the debt and will reorganize the loan. They will act as the medium between the creditors and the debtor.

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What is the Outcome?

Bankruptcy is going to offer you long-term financial benefits. It will help you to fresh start everything. When Chapter 7 will help you to wipe away your debt by selling your possessions, Chapter 13 will offer you to reorganize your debt with a three to five years plan to repay your debt. Both these can help to improve your financial condition. However, there will be some negative impact. The bankruptcy will show on your credit score for around a decade depending on the Chapter you are filing under. If you choose Chapter 7, it will be on credit score for a decade. For Chapter 13, the impact will be for seven years.

During this period, you cannot obtain new credits and you can also face problems while applying for jobs. In brief, you can say that your credit score will be damaged directly if you declare bankruptcy.

When Bankruptcy Should Be Avoided?

As stated earlier, a bankruptcy declaration will not meet all your financial responsibilities. It will not be an appropriate option for a few types of debts. You cannot declare bankruptcy for child support, alimony, taxes, federal student loans, debt for injury while driving under influence, debts incurred six months before declaring the bankruptcy, loans incurred after filing the bankruptcy.

You cannot file bankruptcy for all the above-mentioned debts. However, you can consider other options when you do not qualify for bankruptcy. The key is to get financial support when you need it most. Choose an option that you find suitable depending on your financial status.

About the author

Judith Hayes

Judith Hayes is a freelance writer, photographer and web designer. After working in broadcast journalism for many years, she got serious about her writing. She is the ghost writer, as well as editor, of several books, and was the editor of the "Journal of Health" magazine for several years.

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