What happens when you file for bankruptcy?

What is bankruptcy?

The legal term used to describe the process where a person or a business pay-off part of their debt by asset or property liquidation is called bankruptcy. It is a widely popular term among the general public and carries a social stigma. Rightfully so, a declaration of bankruptcy can have a long-term impact on the future financial situation of an individual. It has dire consequences on credit score reports as bankruptcy remains part of credit records for 7 to 10 years, causing a detriment to applying for future loans and opening credit card accounts.

Types of bankruptcy

There are two types of bankruptcy – Chapter 7 and Chapter 13. Both types have different procedures and consequences.

•         Chapter 7 Bankruptcy.Chapter 7 bankruptcy, also known as straight bankruptcy or liquidation bankruptcy, is the most common type of bankruptcy in which a trustee is appointed to sell out your assets and use that money to pay off your creditors. Chapter 7 bankruptcy remains on your credit report for seven years thus it makes future borrowing difficult.
•         Chapter 13 Bankruptcy. Chapter 13 bankruptcy is also known as rehabilitation bankruptcy. It allows a person to repay debt in a fixed term determined by the Court and bankruptcy attorneythrough negotiations. In Chapter 13 bankruptcy, you don’t lose assets through liquidation, instead, it enables you to clear part of your debt within a specified period. Usually, it is a 3 – 5 years repayment plan. Chapter 13 bankruptcy negatively impacts your credit score as it remains on your credit report for ten years.

Bankruptcy is a normal process that happens often

By understanding the social stigma attached to declaring bankruptcy, it is pertinent to mention that declaring bankruptcy is a normal process that happens to individuals and businesses quite often. Although both types of bankruptcies impact the future financial prospects of a person or business but declaring bankruptcy can ease repaying debt as a last resort. However, Chapter 13 bankruptcy has less severe consequences and provides a cushion for future financial obligations.

How a bankruptcy lawyer assists you in declaring bankruptcy?

Bankruptcy is a complex legal procedure and it can be intimidating for a layman to understand the jargon of the whole process. An experienced and professional bankruptcy lawyer can ensure that the process is carried out as smoothly as possible and that all legal, as well as procedural requirements, are met. A bankruptcy attorney ensures compliance with State regulations and rules during the proceedings at bankruptcy court. An expert bankruptcy attorney can also help in negotiating a viable debt duration for you before the bankruptcy court.

Why you should contact a lawyer right away?

It is essential to contact a bankruptcy lawyer right away when you have already exhausted the alternatives available to you. Filing for bankruptcy is expensive and should always be a last resort. Some alternate options for filing for bankruptcy are;

• Debt Consolidation. Debt consolidation is the pay-off procedure of existing consumer loans and other financial liabilities by applying for a single new consolidated loan. A single consolidated debt is utilized to pay high-interest debts to avoid bankruptcy.
• Renegotiation with existing creditors. Try renegotiating repayment variables with existing creditors. Negotiations can be made about lowering interest rates, making due dates flexible or reducing the quota of monthly payments, etc.
• Debt Management Plan. A government-approved debt counselor can help you with a debt management plan to repay your debts by efficiently managing your spending.

Consequences of bankruptcy

Bankruptcy has dire consequences on your future financial prospects. Some of them are;

• Loss of ownership of property.The immediate consequence of bankruptcy is loss of ownership of belongings – property, jewelry, luxury items, furnishings, vehicles, and other valuable possessions.
• Negative impact on people associated with you.For debts in which other people were sharing liability with you also face the negative impact of bankruptcy.
• Bar on future financial endeavors.Bankruptcy can negatively impact your credit score, thus making it hard for you to apply for future loans. However, if you’re successful in rebuilding your credit score and have not incurred any new debts over two years, your chances to buy a house after filing for bankruptcy increase.
• Impact on credit score.Bankruptcy stays on your credit report for 7 – 10 years, thus it can reshape your image in the eyes of future creditors. Consequently, your chances to secure low interest-based loans or obtain debt at favorable negotiable terms become low.

How often bankruptcy can be filed?

There are no general limits on how often bankruptcy can be filed but there are time limits between the filing of each Chapter 7 or Chapter 13 bankruptcy. It is important to mention that although there are no limits on how many times you can file for bankruptcy, it will adversely impact your credit score in the long run. Remember that each bankruptcy stays for seven to ten years on your credit history.

What are the advantages of filing bankruptcy?

Despite the disadvantages of filing for bankruptcy, there are some advantages to applying for bankruptcy;

• Chance to start afresh. With major debts, mortgages, and personal loans repaid to the creditors through bankruptcy, you can begin a fresh start. It saves you from evictions, foreclosures, and other liabilities.
• Improved credit score. Filing for bankruptcy can improve your credit score as you refrain from incurring new debts and your existing debts are all paid already.
• Cut on credit cards. Credit card cuts can help you to organize your income and improve your financial management plan.
• Access to debt counselors. With access to financial counselors, you can get a better and improved understanding of how to manage your future financial endeavors. This information is beneficial to avoiding potential bankruptcy.