People who are unable to pay their debts could be able to seek bankruptcy protection under the law. There are benefits to declaring bankruptcy since it can relieve an overwhelming financial strain, but there are also drawbacks to consider. It can put an end to most collection attempts, including lawsuits and wage garnishments. It also wipes out a wide variety of debt, such as outstanding balances on credit cards, personal loans, and medical expenses, to name a few.
However, not all lenders will be stopped, and not all debts will be wiped out. For example, if you have a student loan, you remain obligated to pay it back unless you can demonstrate hardship. Alimony, child support, and back taxes also have to be paid in full. In this blog, we'll explore more about what bankruptcy can and cannot do for you.
What a Bankruptcy Filing Can Do
Filing for bankruptcy helps those with overwhelming debt discharge some of their financial obligations and start over. Chapter 7 and Chapter 13, the common types of bankruptcy, have various benefits and, in certain situations, handle obligations and property in different ways. Your bankruptcy chapter of choice should reflect your assets, income, and objectives.
Here are some of the things that will occur in Chapter 7 and Chapter 13 bankruptcy filing.
Filing for Bankruptcy Can Put a Stop to Collection Attempts and Harassment From Creditors
Once a bankruptcy petition is filed, the debtor is shielded by an "automatic stay" provision of the law. You will be protected from legal action by the lenders until either your bankruptcy case is dismissed or a repayment schedule is put in place. The automatic stay prevents creditors from contacting debtors, garnishing wages, or filing litigation against debtors. For example, criminal court proceedings will resume, and creditors are still able to collect the support payments.
Filing for Bankruptcy Can Improve Credit Ratings
Bankruptcy is widely known to have negative effects on credit scores. However, if your credit rating was not stellar before you declared bankruptcy, it will likely improve once your obligations are cleared. Eliminating debt could assist in reducing your ratio of credit utilization, which serves as one of the elements that determine your credit rating.
Bankruptcy Can Block Foreclosure, Temporary Eviction, or Repossession
While the court proceedings are still pending, these actions could be halted automatically. Bankruptcy will be of no use once the proceedings have been completed.
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Repossession and Foreclosure
While a Chapter 7 bankruptcy filing will prevent further action in repossession or foreclosure, it will not allow you to retain the property in question. Once the automatic stay is removed, you risk losing your vehicle or house if you are unable to bring your finances current. Chapter 13 bankruptcy, on the other hand, includes a process that will enable you to make up for missed payments and keep the property.
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Evictions
A bankruptcy filing will immediately halt any ongoing eviction litigation. However, this is expected to be a short-term arrangement. It's worth noting that in most jurisdictions, bankruptcy is not an option if the property owner has already obtained a court order to evict you from the house.
After Having Your Debts Dismissed, You Will Be Able To Apply For New Credit
Once your debts have been dismissed in bankruptcy, you can begin the credit-rebuilding process. Credit card applications for some people are granted nearly immediately following the issuance of a discharge order. However, you should expect a few obstacles when trying to get approved for new credit, especially in light of your likely low credit rating. Getting secured credit cards could be an excellent starting point.
Most Other Non-Priority Unsecured Loans, Including Credit Card Debts Can Be Discharged
Most unsecured obligations, except student loans, can be discharged in bankruptcy. For example, bankruptcy can clear off your unsecured credit card debts, overdue utility bills, medical bills, gym contracts, and personal loans, to name a few.
If you didn't guarantee to surrender the item you bought if you defaulted on the installment payment, the loan is considered unsecured. If, on the other hand, you used secured credit cards to complete the transaction, you will have to give back the items in question. Debts are commonly secured by valuables such as jewelry, laptops, furniture, electronics, and large appliances, to name a few.
Bankruptcy Can Discharge Secured Debt
You can have your financial obligations discharged through bankruptcy filing if you’re unable to make payments on a loan or mortgage secured by collateral. However, you will not be allowed to retain your home, vehicle, computer, or any other item used as security for your loan. As soon as you voluntarily consent to use property to guarantee your debt, you are required to repay the financial obligation or surrender the asset.
Some Unpaid Back Taxes Could be Resolved
When your income is being withheld due to unpaid taxes, filing for bankruptcy could be an efficient solution. Bankruptcy often does not wipe out tax debts, but there are exceptions for certain older tax obligations. You can apply if you owe money for back income taxes that are at least three years old. No bankruptcy can ever wipe out fines for fraud or payroll taxes.
You'll Be Assigned a Court-Appointed Trustee
Once you submit your bankruptcy request, a bankruptcy trustee will be appointed to handle your case through filing your discharge. Throughout the procedure, they will act on your behalf at all times. The trustee will also handle any correspondence between you and the creditors you owe, and in cases involving Chapter 13 bankruptcy, they'll be the ones to take your repayments and process them.
Bankruptcy Can Stop More Legal Action
You can be freed of your debt's legal obligation after filing for bankruptcy, which is one of its main advantages. Additionally, it could be able to stop any future lawsuits brought on by the failure to settle that loan. However, the majority of unsecured debts owed by consumers can be discharged in bankruptcy, even though not all obligations are dischargeable.
Bankruptcy Can Settle Your Debts For Less Than You Owe
Your lenders will be required to accept whatever amount the bankruptcy court approves, which might mean accepting very little or nothing at all. If you're eligible for bankruptcy under Chapter 7, you could be able to have all your unsecured obligations discharged, including personal loans, medical debt, and credit card debt. However, in Chapter 13, you could be mandated to make payments on some of your obligations for 3 to 5 years, which can make the process more complicated.
What Filing for Bankruptcy Under Chapter 13 Can Do
Both Chapters 7 and 13 offer different remedies for debt issues. Both types of bankruptcy operate in quite different ways. For example, the chapter you choose will determine how swiftly your debt will be discharged:
- Chapter 7— usually takes 3 to 4 months on average to complete.
- Chapter 13— you will almost certainly be required to repay part of the unsecured obligations for three to five years. However, once the repayment schedule is completed, any unpaid balance of unsecured loans will be discharged.
Since Chapter 7 is meant largely for a low-income filer, it will not assist you in keeping your possessions if you are behind on loan payments. However, you could benefit from Chapter 13's additional benefits, provided you earn enough to make at least some payments to your creditors.
The following are some examples of what Chapter 13 bankruptcy is capable of doing
Stop Mortgage Foreclosures
Submitting a Chapter 13 bankruptcy petition can block foreclosure and compel the creditor to accept a repayment plan that would let you catch up on missed payments gradually. For this schedule to be successful, you should be able to show that you have sufficient income to cover overdue installments and can keep up with future payments.
Allows You To Retain Property That's Not Protected by Bankruptcy Exemptions
When declaring bankruptcy, you can keep the things that are necessary for your survival and work. In contrast to Chapter 13 filers, Chapter 7 filers forfeit their nonexempt property, which the bankruptcy trustee sells to pay creditors. Although it seems as though you would be able to retain more of your possessions, this isn't the case. The value of nonexempt assets is distributed among creditors under Chapter 13 repayment plans.
If the value of the collateral is less than the financial obligations, it is possible to "cram down" the secured debt. You can lower debt to replace the value of the asset that serves as its security under Chapter 13's procedures. For instance, if you owe $20,000 on an automobile loan but the vehicle is only worth $15,000, you could offer a plan to pay your creditor $15,000 and have the remaining balance of the loan discharged.
However, there are exceptions. For example, if you bought the vehicle 30 months before filing for bankruptcy, you cannot cram down the debt. Additionally, bankruptcy filers are not permitted to lower their residential mortgage using the cramdown option.
What Filing For Bankruptcy Can’t Do For You
Not all debt issues can be resolved through bankruptcy. It can't do the following.
Bankruptcy Does Not Bar Secured Creditors From Repossessing or Foreclosing Property You Cannot Afford
While a bankruptcy clearance wipes off debts, it does not remove liens. A lien allows the creditor to seize properties, dispose of the assets at public auctions, and utilize the proceeds generated to settle the outstanding debt. The property is subject to the lien until the obligation is cleared. Bankruptcy can wipe off your debts if it’s a secured loan—that is if the lender has a lien over the property.
However, it does not eliminate the lien on your property. The lender could still recover the security deposit. For instance, if you declare Chapter 7, you can get rid of your mortgage. However, the home will remain under the lien of the creditor.
Once the stay is removed, the creditor can take advantage of their lien rights and foreclose on your property, so long as your mortgage loan is outstanding.
Bankruptcy Does Not Discharge Alimony and Child Support Payments
If you have an alimony or child support obligation and declare bankruptcy, you will be responsible for paying the full obligation, as you would before filing for bankruptcy. Also, if you declare Chapter 13 bankruptcy, you have to incorporate payments for all of these financial obligations into the repayment plan.
Student Loan Debt Can't Be Discharged By Bankruptcy
Bankruptcy cannot clear your student debt. However, if you file for bankruptcy, you might be able to get rid of your student debts if you are able to prove that making payments would place you in a position of "undue hardship." You should show that you’re currently unable to make payments on your obligations and that there’s little chance you’ll manage to settle the debt in the years to come.
Most Tax Debt Arrears Cannot Be Eliminated Through Bankruptcy
Clearing tax debt through bankruptcy can be challenging. However, it is often achievable for older tax bills in arrears.
Other Nondischargeable Obligations
Both bankruptcy chapters prohibit the discharge of the following obligations:
- Financial obligations you fail to disclose in a bankruptcy case (until the creditor finds out).
- Penalties and fines levied as a form of punishment, like restitution and traffic tickets.
- Debts for wrongful death or personal injury resulting from drunk driving.
These obligations will remain on your record after the case is filed for bankruptcy under Chapter 7. A Chapter 13’s repayment schedule will allow you to eliminate all of your dischargeable debts.
Fraud-Related Debt Can't Be Erased
If a lender initiates a lawsuit, known as an adversary action, and successfully argues that a debt related to fraud is eligible for your bankruptcy, then the bankruptcy will not discharge the obligation. Such debts could result from falsifying details on an application for credit or giving out borrowed assets as your own to use them as security for the loan.
Bankruptcy Can't Protect Your Job Status or Career
Bankruptcy can sometimes hinder you from retaining certain job positions, even though it's rare. Declaring bankruptcy will most likely cause problems for individuals who handle money, such as those in the fields of payroll or accounting. Since it's a public record, a prospective employer can see a bankruptcy filing through a credit screening for employment when you apply for a job opening.
Bankruptcy Has No Control Over the Effect on Credit Limits and Interest Rates
Filing for bankruptcy doesn't necessarily mean you can't get new credit, but it could cost you more than usual. Creditors could consider you a risky applicant, which means that you might only be approved for small amounts of credits, and you are more likely to be levied at high-interest rates as a result.
Your Bankruptcy Trustee Will Continue To Manage Your Property After You Are Discharged
The trustee can pursue the disposal and equitable distribution of your belongings following the discharge of your obligations, based on the details of the situation. This includes any income or assets received within the first 180 days after the discharge process, like a divorce settlement or inheritance.
You'll Probably Have Problems Renting In The Years To Come
After filing for bankruptcy, you can have trouble finding a rental property since some property managers or landlords could automatically turn away potential clients who have bankruptcy on their credit file.
You Can Lose Your Company
If you're running a company and the bankruptcy trustee determines that it is valuable, you might be compelled to liquidate it. In certain situations, the trustee could oversee the company's operations until the transaction is finalized.
You Could Face Eviction
If you are renting your house and are late on payments, you risk being evicted after the bankruptcy process is completed. However, if you're timely on your rent, it's rare to get evicted due to a bankruptcy declaration.
It Does Not Address the Underlying Reason For Your Financial Difficulties
Although bankruptcy could be an option in some situations, it does not tackle the underlying cause of the problem. You risk making the same mistakes again and having to declare bankruptcy again if you don't have a solid strategy in place.
FAQs on Bankruptcy
Below are a few bankruptcy-related questions that come up frequently.
Is Declaring Bankruptcy Beneficial In Any Way?
Declaring bankruptcy can relieve some of the financial stress you're experiencing. It could allow you to save some money so you can easily cover your mortgage or rent, utilities, and various other essential costs. If you feel overburdened by your financial obligations, declaring bankruptcy could essentially allow you to start over.
What Losses Are Involved in Bankruptcy Filings?
Property that is not exempt from liquidation under Chapter 7 bankruptcy regulations could be sold by the bankruptcy trustee appointed to your case. These possessions might involve luxurious items like jewelry, boats, and automobiles. Even so, in some Chapter 7 bankruptcy cases, the trustee could rule that your possessions aren't worth disposing of or that all of your goods are exempt from the exemption rules. When you file for Chapter 13, you settle a portion of your debt with your lenders while keeping your property secure.
Find a San Diego Bankruptcy Attorney Near Me
Declaring bankruptcy can seem simple on paper, but in practice, it's a complex process. Once you've decided to take this route, it's essential to retain the services of a bankruptcy lawyer. There are many attorneys whom you can trust, but only a handful are capable of offering the level of service you require. We at San Diego Bankruptcy Attorney are dedicated to providing the best legal counsel to achieve the best possible outcome. Call us today at 619-488-6168.
