Bankruptcy is a complex and often confusing legal process that can have long-term impacts on your financial future. It is a legal process that allows individuals or businesses to have some or all of their debts forgiven or restructured.
It’s essential to understand what bankruptcy is and how it works before deciding whether or not it’s the right option for you. But what exactly happens when you declare bankruptcy? Here is a detailed look at the process and its consequences.
Why Do People Declare Bankruptcy?
There are several reasons why someone might choose to declare bankruptcy. In most cases, the person or organization has become overwhelmed by debt and can’t pay all their bills on time. This could be due to medical bills, credit card debt, student loans, or any other type of loan. Declaring bankruptcy may be their only option to avoid financial ruin.
The Bankruptcy Process
Meeting With a Lawyer
When you decide to file for bankruptcy, the first step is to meet with a lawyer and/or a financial advisor who can help you understand the process and discuss your options. After assessing your situation, they will advise you on which type of bankruptcy best suits your needs.
Individuals and businesses can file for several types of bankruptcy, including Chapter 7, Chapter 13, and Chapter 11. The most common types of bankruptcy for individuals are Chapter 7 and Chapter 13. For you to understand the different types of bankruptcy, let’s shred each one:
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is typically used by individuals who cannot repay their debts. Under this type of bankruptcy, a court-appointed trustee will sell the individual’s non-exempt assets to pay off their debts. Exempt assets may include items such as a primary residence, retirement accounts, and certain personal possessions.
After the sale of non-exempt assets, the remaining debts are generally forgiven. However, filing for Chapter 7 bankruptcy can significantly impact an individual’s credit score and may make it difficult to obtain credit in the future.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as reorganization bankruptcy, is typically used by individuals with a regular income and the ability to repay some of their debts. Under this type of bankruptcy, the individual’s debts are restructured into a repayment plan that lasts for three to five years.
The individual will make monthly payments to a bankruptcy trustee, who will then distribute the funds to the individual’s creditors. After the repayment plan is completed, any remaining eligible debts are forgiven.
Chapter 13 bankruptcy may not have as significant an impact on an individual’s credit score as Chapter 7 bankruptcy, but it can still make it difficult to obtain credit in the future.
Chapter 11 Bankruptcy
This type is typically used by businesses that want to restructure their debts and continue operating. Under this type of bankruptcy, the business creates a reorganization plan that outlines how it will pay its debts and remain in operation.
The business must present the plan to its creditors, who can accept or reject it. If the creditors accept the plan, the business can continue operating and make payments to its creditors according to the plan’s terms. If the creditors reject the plan, the business may need to liquidate its assets and close down.
Filling Out Paperworks
The next step is to fill out the appropriate paperwork and file it with the court. This includes a detailed list of all your debts, assets, income, and expenses. The court will then review the information and decide whether or not you qualify for bankruptcy protection.
Once you have filed for bankruptcy, creditors must stop all collection efforts against you. This includes wage garnishments and calls from debt collectors. In most cases, your creditors will be notified within a few days of your filing for bankruptcy.
Regardless of the type of bankruptcy an individual or business files for, the process begins with filing a bankruptcy petition with the bankruptcy court. The petition must include detailed financial information, including a list of the individual’s or business’s debts and assets.
The individual or business will also need to attend a bankruptcy hearing, where a bankruptcy judge will decide whether to grant the bankruptcy petition and, if so, what type of bankruptcy the individual or business will be granted.
Benefits of Declaring Bankruptcy
The primary benefit of declaring bankruptcy is the fresh start it provides to individuals and businesses, allowing them to move forward with their financial lives. Bankruptcy can also provide other benefits, including:
- Relief from creditor harassment: Once a bankruptcy petition is filed, creditors must stop all collection activities against the debtor. This can provide much-needed relief from creditor harassment.
- Debt discharge: Bankruptcy can allow an individual or business to have some or all of their debts discharged. This means the debtor no longer has any obligation to repay that debt, providing them with financial freedom and a clean slate.
- Automatic stay: Once a bankruptcy petition is filed, an automatic stay is put in place. This prevents creditors from taking further action against the debtor until the bankruptcy proceedings are complete.
- Lower interest rates: Bankruptcy can lead to lower interest rates on credit cards and other loans. This can provide some financial relief to individuals or businesses struggling with debt.
Although bankruptcy can provide some much-needed financial relief, it is crucial to understand the potential consequences and benefits before filing for bankruptcy. It is also wise to seek advice from a financial professional or legal counsel to ensure that all necessary steps are taken when filing for bankruptcy.
At EZ Legal Fees by WantAFreshStart, our experienced professionals can help you with this process and guide the bankruptcy filing process.
Consequences of Filing Bankruptcy
When you declare bankruptcy, an automatic stay is put in place, which means that creditors are prohibited from trying to collect debts from you. This can temporarily relieve creditor harassment and allow you to focus on rebuilding your finances. Declaring will also provide you with all the benefits mentioned above. However, bankruptcy can have consequences, including:
- Damage to credit score: Bankruptcy can significantly impact an individual’s credit score, making it difficult for them to obtain credit in the future.
- Loss of assets: Depending on the type of bankruptcy filed, an individual may need to sell some or all of their non-exempt assets to pay off their debts.
- Difficulty obtaining a loan: Bankruptcy can make it difficult for an individual to obtain a loan as lenders may be hesitant to lend money to someone who has filed for bankruptcy in the past.
- Loss of security clearance: Depending on the type and severity of the debt, an individual’s security clearance may be revoked if they file for bankruptcy.
- Loss of employment: An individual’s employer may not be willing to hire someone who has filed for bankruptcy.
- Stress: Bankruptcy can be a stressful experience and affect an individual’s emotional health.
Let Us Help You
Declaring bankruptcy is a difficult decision that requires careful consideration. It can provide much-needed financial relief but also has several potential consequences. Individuals and businesses should understand all the potential risks and benefits before filing for bankruptcy.
Seeking advice from a financial professional or legal counsel is recommended to ensure appropriate steps are taken when filing for bankruptcy.
If you don’t feel comfortable filing for bankruptcy on your own, EZ Legal Fees by WantAFreshStart can help. Our team of legal attorneys and financial professionals will guide you through the process and provide advice throughout. Contact us today to learn more about how we can help you get a fresh start.