Filing for bankruptcy can be seen as a legal lifeline for individuals drowning in debt. People and businesses can petition courts to release them of these debts under Bankruptcy Code. In most instances, these requests are granted, providing filers with a ‘fresh start.’ 

If you’re struggling to keep your head above water, filing for bankruptcy can help you eliminate or reduce your debts. This can empower you to breathe a little and get in a more stable financial position. 

Although bankruptcy is an exceptional way to wipe away your debts, it’s vital to know that this should be considered as a last resort option. Its credit and financial consequences are severe. In many cases, it can take years to recover. 

Moreover, you need to meet various requirements to file for bankruptcy, which can vary depending on what type of bankruptcy you’re petitioning for. An example of this is that filers are required to complete a credit counseling course and align with specific income guidelines before moving forward with the filing process. 

You might be wondering who can file for bankruptcy and if you qualify. We’re going to take you through everything you need to know when considering filing for bankruptcy. Continue reading to find out about the bankruptcy basics. 

Why Do People File for Bankruptcy? 

Nobody’s financial circumstances are the same, especially when it comes to the conditions surrounding them filing for bankruptcy. Nonetheless, many filers head to the bankruptcy court for similar reasons. According to the American Bankruptcy Institute, these are the three most prevalent causes leading people to file for bankruptcy: 

Medical Costs 

A health care issue like an unseen personal injury or catastrophic illness can leave individuals drowning in medical debt. One of the best ways to alleviate these debts is to file for bankruptcy. 

Job Loss 

Losing a job can cause devastating financial troubles, such as failing to pay auto loan installments, mortgage, or other debts. However, consumers can gain a fresh start when they file for bankruptcy. 

Divorce 

Ending a marriage is known to dump a load of debt on either spouse or both. Additionally, this change in financial situation can make it extremely challenging to pay off these costs. 

Who Can File for Bankruptcy? 

Generally speaking, anyone can file for bankruptcy. However, not all filers can qualify for a specific form of bankruptcy. This is because the requirements for Chapter 7 bankruptcy and Chapter 13 bankruptcy are different. 

A consumer might align with the requirements for one form of bankruptcy but not the other. Nonetheless, this relief is made available for honest debtors who have too much debt and are unable to repay it. 

When Should You Declare Bankruptcy? 

If you’re considering filing for bankruptcy, it’s recommended to think hard about whether you can realistically pay off these debts in less than five years. If you’re unable to do this, it might be in your best interest to declare bankruptcy. 

The ideas behind the bankruptcy code were to offer debt relief to those who need it and give them a second chance. This was opposed to punishing them forever. Declaring bankruptcy is your way out of financial turmoil if a combination of ill-money management and bad luck has devastated your monetary position. 

Bankruptcy filing carries significant long-term penalties, as it’s stuck on your credit report for approximately seven to 10 years. This can make getting loans in the future more challenging. Nonetheless, filers can gain great emotional and mental relief when all these qualifying debts are wiped away. 

Who Qualifies for Chapter 7 Bankruptcy? 

Also known as liquidation or straight bankruptcy, Chapter 7 bankruptcy can clear filers of many unsecured debts. Nonetheless, not all consumers can file for this form of bankruptcy. Here are the requirements to petition for Chapter 7 bankruptcy in federal court: 

• You haven’t filed for Chapter 7 bankruptcy in the last eight years. 
• Your monthly income average within the previous six months needs to be lower than your state’s median income for the same-sized household. If your monthly income isn’t lower, you’re required to pass a means test. This test is equipped to determine if your disposable income is adequate to make partial payments to your unsecured creditors. Those who fail this means test might still qualify for Chapter 13 bankruptcy. 
• You haven’t filed for Chapter 13 bankruptcy in the past six years. 
• You’ve completed a group credit counseling course facilitated by an approved credit counseling agency within 180 days before filing bankruptcy. 
• If you’ve filed for Chapter 7 or Chapter 13 bankruptcy but your case was denied, you’re required to wait 181 days before filing bankruptcy again. 
• A judge can throw your case out if they find you attempting to defraud your unsecured creditors even if you’re eligible to file for Chapter 7 bankruptcy. An example of this could be running up charges on a credit card while intending to declare bankruptcy to prevent paying for these debts. 

Who Qualifies for Chapter 13 Bankruptcy? 

Chapter 11 and 13 bankruptcy are viewed in the same way. However, Chapter 11 is mainly for businesses while Chapter 13 is for personal debts. The requirements of filing for this form of bankruptcy in court differ from Chapter 7. Here are the bankruptcy laws associated with this form: 

• Your unsecured debts (like medical bills and credit card payments) need to be less than $419,275 while your secured debts (like car and mortgage payments) are required to be less than $1,257,850. These amounts have been put into place until April 2022 while debt limits are altered every three years. 
• You need to wait 181 days or more before you can refile for bankruptcy if your Chapter 7 or Chapter 13 bankruptcy case was thrown out. 
• You need to provide proof that you’ve filed state and federal income tax returns for four years. 
• You’re required to have sufficient income to make the monthly debt repayments stipulated in your bankruptcy plan. 
• You generally need to complete an individual or group credit counseling course facilitated by an approved credit counseling agency within 180 days before filing for Chapter 13 bankruptcy. 

What Should You Not Do When Petitioning for Bankruptcy? 

Bankruptcy is a life-changing experience. However, you want to ensure it’s a positive one. That’s why it’s best to know what not to do before you present the court. Here are the common mistakes you should avoid: 

• Lying about your assets – A means test is a legal requirement when petitioning bankruptcy court. This is where you disclose your income and assets. Your case can be dismissed if you aren’t honest about your property, income, and other assets. 
• Not consulting an attorney – Bankruptcy law is far too complicated for average consumers to adequately fulfill. An attorney can ensure you’re aligning with all legal subtleties to prevent your case from getting dismissed by the court. 
• Running up credit card debt – The mentality of using the available limit on your card before applying for bankruptcy is bound to catch up to you. Creditors can challenge your request to eliminate this debt if they believe you ran up the amount on purpose. 
• Taking on new debt – You might not run up your card balances, but taking on new debt when you’re considering bankruptcy is a massive mistake. You should suspend any debt once you know that the next step in your journey is bankruptcy. 
• Transferring property to friends and family – Doing this is illegal and can derail all your bankruptcy efforts. You can’t transfer any assets to protect these from repossession or foreclosure. There are other legal methods of keeping your property in bankruptcy. 

How Can Filing for Bankruptcy Affect Your Credit? 

Petitioning for a bankruptcy discharge is one of the worst things anyone can do for their credit. This is because it’s a signal to future creditors that you couldn’t previously meet your debt obligations. Nonetheless, personal bankruptcy cases don’t leave a permanent mark on your credit report. Hence, you can begin rebuilding your credit while improving your financial situation. 

It doesn’t matter if you file for Chapter 7 or Chapter 13 bankruptcy, as both of these reflect on your credit reports for card issuers and other creditors to view. In many instances, lenders take your bankruptcy into account when you’re applying for credit. After you’ve completed the bankruptcy process, your credit reports can show that your debts have been covered by your discharge. 

A Chapter 7 bankruptcy typically remains on your credit reports and affects your score for 10 years from the date your court case was filed while Chapter 13 remains for seven years. Nonetheless, the effect of this bankruptcy discharge slowly decreases as time passes. 

When applying for credit, creditors might not approve debtor applications unless this bankruptcy has been discharged. Even then, a debtor might find it challenging to obtain specific types of debts. Moreover, a debtor might be confronted with high-interest levels and other lending terms if their application is approved. 

It’s worthwhile mentioning that many creditors may view Chapter 13 filing in a better light than Chapter 7. This is because many creditors view Chapter 13 filers as being less of a credit risk than Chapter 7 filers. After all, this type of bankruptcy comes with a repayment plan for all or some of their debt lasting either three or five years. 

How Can You Rebuild Your Credit After Bankruptcy? 

Although bankruptcy can tarnish your credit reports, it doesn’t last forever. Additionally, you can do a lot to rebuild your credit before this bankruptcy disappears from your credit reports. Here are some of the most effective ways to begin rebuilding your credit: 

Make On-Time Payments 

Payment history plays a significant role in the most frequently used credit scoring models when your scores are calculated. On-time loan and credit card payments display that you’re a responsible borrower. Hence, it can help bump up your scores. 

Manage Past-Due Accounts 

If you’ve missed payments on household bills, like for cellphone services or utilities, these accounts can be charged off and carried to bill collectors. Handing an account over to collectors can harm a credit score. That’s why paying these past-due accounts can stop these debts from dragging your scores down. 

Boost Your Credit Scores 

You’re presented with many ways to boost your credit scores. As we have already mentioned, on-time bill payments can help elevate your scores. This is especially the case if you take advantage of free services equipped to count your on-time payments on your credit report. Such services can potentially lead to an instant rise in your credit scores. One example of this free service is Experian Boost. 

Keep Your Credit Card Balances as Low as Possible

Not many people know this but you don’t need to maintain a balance on a credit card to preserve good overall credit. You can actually pay off your full credit card balances. Doing this consistently each month is known as one of the fastest ways of getting better credit. 

Begin an Emergency Fund 

Placing money aside for emergencies, such as medical bills or car repairs, can prevent you from running up your credit card or missing bill payments. This fund doesn’t need to be massive. In many instances, stashing enough money to cover one monthly rent payment can help keep you out of financial issues. 

Consider Obtaining a Secured Credit Card 

Secured cards require debtors to present a security deposit, which is unlike unsecured credit cards. This allows lenders to issue credit cards to people who don’t have great scores. With this secured card, the issuer gets to keep your deposit if you miss payments. 

When applying for this secured credit card, you should ensure the issuer reports your payment activity to all three credit bureaus. These are Equifax, TransUnion, and Experian. Using this secured credit card responsibly can help you improve your scores. However, defaulting and missing payments can leave you in an even worse position than before. 

Why Should You Seek Professional Advice from a Bankruptcy Attorney? 

Understanding what type of bankruptcy you should file for, if you qualify for Chapter 7 or 13, the process involved in wiping away your credit card debt, what exemptions you should list your real estate as, or how to address your bankruptcy trustee can be time-consuming and challenging. Even if you learn the bankruptcy basics, you’re still left with a lot of room to make errors. 

Petitioning for bankruptcy without a bankruptcy lawyer can make this process more complex than it needs to be. Additionally, hiring an attorney can help ensure you’re receiving the proper legal advice to deal with the creditors you need to pay. Moreover, this attorney can communicate with your trustee to ensure your court case is being dealt with correctly and you’re gaining a repayment plan that works best for you. Here are some examples where seeking professional help can be beneficial: 

• An attorney can help you decide between Chapter 7 and Chapter 13 bankruptcy in court while ensuring you aren’t committing bankruptcy fraud (and aligning with federal and state law) during legal proceedings in U.S courts. 
• Financial advisors can guide you through creating a budget and debt repayment plan. 
• A credit counseling agency could work with you on managing your repayment plan, so you can avoid having to file for bankruptcy. 

Where Does Bankruptcy Not Help? 

Although bankruptcy filing can help wipe away debt and offer a fresh start to a debtor, it doesn’t erase all financial responsibilities. There are some assets to pay off that can’t be discharged when you file for bankruptcy. These obligations include: 

• Debts incurred from any personal injury sustained while driving intoxicated. 
• Any loans obtained fraudulently.
• Some taxes.
• Some debts that were incurred in the most recent six months before you file. 
• Debts arising once bankruptcy has been filed. 
• Court-ordered child support or alimony. 
• Federal student loans (unless the debtor aligns with the strict criteria associated with these student loans). 

Additionally, those who have co-signed on debts aren’t protected when a debtor files for bankruptcy. This co-signer agreed to pay off this credit if the debtor was unable to do so. When declaring bankruptcy, the co-signer might be legally obligated to pay part of or the complete loan amount. 

The Bottom Line 

Chapter 7 and Chapter 13 bankruptcy cases should be taken seriously. Although this form of debt management can help you obtain exceptional debt relief, it can also tarnish your credit score and image with potential creditors in the future. Hence, it’s crucial to give much thought to creating a bankruptcy petition before filing. The long-lasting effects on your credit report associated with a bankruptcy discharge are something you shouldn’t take lightly. 

Nonetheless, you can gain a fresh start when you file bankruptcy. This is because it places you on a path towards financial stability. It’s recommended to monitor your credit score before, during, and after bankruptcy so you track your process. Moreover, bankruptcy laws associated with the different types of bankruptcy can make the task of filing incredibly daunting. That’s why you should always consider seeking legal advice from a bankruptcy lawyer before your case is filed.