10 Tips On How To Choose The Right Type Of Bankruptcy
Deciding to file for bankruptcy is never easy. But if you're at the point where you've exhausted all other options, it's important to know that there is light at the end of the tunnel.
One of the first steps in filing for bankruptcy is choosing which type is right for you.
Each type has its own set of pros and cons.
The type of bankruptcy you choose will depend on your circumstances.
Here are 10 tips to help you choose the right type of bankruptcy for you.
1)) Evaluate Your Financial Situation
Before you can choose the right type of bankruptcy, you need to take a close look at your financial situation.
This includes your income, assets, debts, and expenses.
This will give you a better idea of which type of bankruptcy will be best for you.
2)) Know the Difference Between The Bankruptcies
Chapter 7 bankruptcies are often called "liquidation" bankruptcies.
This is because your assets are sold off to repay your creditors.
Chapter 13 bankruptcies are often called "reorganization" bankruptcies.
This is because you're given a repayment plan to repay your debts over time.
3)) Determine If You Qualify for Chapter 7 Bankruptcy
To qualify, you must pass what's called the "means test."
This test looks at your income and compares it to the median income in your state.
If your income is below the median, you may qualify.
4)) Determine If You Qualify for Chapter 13 Bankruptcy
With this type of bankruptcy, you're able to keep all your assets.
However, you'll be required to develop a repayment plan in which you'll pay back a portion of your debt over a three-to-five-year period.
To qualify for Chapter 13, your total debt must be less than $394,725 and your secured debt must be less than $1,184,200.
You must also have a steady source of income with which to make payments on the repayment plan.
Chapter 13 is a good option if you own a home and don't want to lose it through foreclosure or if you're behind on payments but caught up by the time you file for bankruptcy.
5)) Understand What Chapter 13 Bankruptcy Entails
With Chapter 13 reorganization bankruptcy, as we mentioned before, you'll develop a repayment plan and make payments on that plan over three to five years.
Your creditors will be paid back through this plan based on what they're owed and the type of debt they are owed.
For example, secured debt such as a mortgage or car payments will take precedence over unsecured debt such as credit card debt or medical bills.
One thing to keep in mind with Chapter 13 is that it will stay on your credit report for seven years from the date you file, whereas with Chapter 7, it will stay on your credit report for 10 years from the date you file.
However, even with these negative marks on your credit report, once you complete a Chapter 13 repayment plan, most people find their credit scores have increased by 100 points or more thanks to their newfound financial stability post-bankruptcy.
6)) Consider the Pros and Cons of Each Type of Bankruptcy
Each type of bankruptcy has its own set of pros and cons. For example, with a chapter 7 bankruptcy, you can get rid of most of your debt quickly.
However, you may lose some of your assets in the process.
With a chapter 13 bankruptcy, you can keep all your assets.
However, it may take longer to get out of debt.
7)) Talk to A Bankruptcy Attorney
A bankruptcy attorney can help you evaluate your financial situation and advise you on which type of bankruptcy would be best for you.
They can also help you with the paperwork and filing process.
8)) Choose the Appropriate Type of Bankruptcy
No two people's financial situations are exactly alike.
That's why it's important to choose the type of bankruptcy that will work best for your unique circumstances.
For example, if you have a lot of nonexempt assets, chapter 7 may not be the best option for you.
On the other hand, if you have a lot of debt but not a lot of income, chapter 13 may not be the best option for you either.
It's important to carefully consider all factors before deciding.
That’s where an experienced bankruptcy lawyer comes in.
9)) Understand the Risks Involved
There are risks associated with both Chapter 7 and Chapter 13 bankruptcy.
With Chapter 7, some of your assets may be liquidated in order to repay your creditors. This can include your home, car, or other valuable possessions.
There is also a risk that you may not receive a discharge of your debts, which means you will still owe your creditors even after filing for bankruptcy.
With Chapter 13, you may have to agree to a repayment plan that lasts for three to five years.
If you fail to make your payments as agreed, your bankruptcy may be dismissed, and you may have to start the process over again.
You may also be subject to higher interest rates and penalties if you miss a payment.
Both Chapter 7 and Chapter 13 bankruptcy can have a negative impact on your credit score, making it more difficult to get approved for loans or credit cards in the future.
They can also make it difficult to rent an apartment or buy a car.
If you are considering filing for bankruptcy, it is important to speak with an experienced bankruptcy attorney to discuss your options and the risks involved.
10)) Consider Bankruptcy Alternatives
If neither Chapter 7 nor Chapter 13 seem like the right fit for your situation—for instance maybe your income is too high to qualify for Chapter 7, but your debt is too low to qualify for Chapter 13 — consider some alternatives such as consumer proposal or non-profit credit counseling services.
A consumer proposal is an agreement between you and your creditors in which you agree to repay a portion of what you owe over a period (usually between three and five years).
This can be a good option if your total debt load is less than $250,000 (not including mortgage debt).
Non-profit credit counseling services work with both you and your creditors to help create a budget and develop a plan to get out of debt within three to five years without having to declare bankruptcy.
These services don't reduce or eliminate debts but can sometimes help lower interest rates and monthly payments making it easier for many people to stay afloat financially until they're able to climb back up again.
Conclusion
If you’re considering bankruptcy, it’s important to speak with an attorney who can help guide you through the process.
A qualified bankruptcy attorney will be able to assess your unique financial situation and recommend the best course of action for you.
Bankruptcy isn’t always the right choice, but an experienced lawyer can help make sure that you file for bankruptcy if it is.
You do not want to play around with your credit because it can make or break your buying power and impact your livelihood.
To be on the safe side, schedule a consultation with an attorney so that they can review your financial situation and help you get back on track.