You don’t know how it happened, but your debt has crept up on you. It seems that the only way to make it go away is to file for bankruptcy protection. While bankruptcy seems to promise to give you a clean slate and to help reduce the pain of debt, it is more involved than it looks. Find out what happens when you declare bankruptcy so you are better able to make the best decision for yourself and for your financial future.
If you are thinking about filing bankruptcy, counseling is a requirement. Bankruptcy counseling consists of two parts. Part one is completed up to 180 days before you file. Part two, debtor education, takes place after you have declared bankruptcy. After you complete part one, you will receive a certificate that you can use as proof when you file.
Because counseling is a legal requirement and the goal is to help you, counseling fees are generally low. CESI charges $30 per session and offers a waived fee for people who qualify.
Types of Bankruptcy
Not all bankruptcies are the same. What happens when you declare bankruptcy depends, in part, on the type of bankruptcy you file. Two types are the most common among individuals: Chapter 7 and Chapter 13. Chapter 7 bankruptcy is a liquidation plan, and Chapter 13 is a debt management plan. The requirements and procedures for both are set out by the US courts.
To qualify for Chapter 7 bankruptcy, you typically need to earn less than the median income in your state. During the bankruptcy process, the trustee will collect your assets and sell them to pay off your debts. Some assets are exempt from collection. For example, if you are up-to-date on your mortgage payments, your house cannot be seized.
If you file Chapter 13 bankruptcy, none of your assets are seized. Instead, the judge comes up with a payment plan that has you paying down your debts in a few years. To qualify for Chapter 13, you need to earn enough to participate in the payment plan, and the total amount of your secured and unsecured debts needs to be below certain limits.
What Happens to Your Debts
When you file Chapter 7 bankruptcy and your debts are discharged, you no longer have to worry about paying them. If you are able to follow a Chapter 13 payment plan, you do not have to worry about your debts once you have made all the required payments.
Some debts cannot be discharged in either type of bankruptcy. If you have student loan debt, for example, you will still be responsible for it even after you have declared bankruptcy. The same is true if you have tax debt or owe child support or alimony.
What Happens Afterward
It is important to understand that while bankruptcy can seem like a quick fix to your debt problems, it is not. The bankruptcy remains on your credit report for up to 10 years, which can impact your ability to get future loans or credit.
Declaring bankruptcy should be a last resort—something you turn to when you have used up all other options. Before you consider bankruptcy, consider a debt counseling program that will help you learn how to budget, manage your debt and get back on your financial feet without the negative impact of filing for bankruptcy.
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Consumer Education Services, Inc. (CESI) is a non-profit service provider of comprehensive personal financial education and solutions for all life stages and for all of life’s milestones. Our goal is enhanced economic security for everyone we serve.
CESI is NOT A LOAN COMPANY