How to Navigate Bankruptcy as Your Last Resort

Debt can be a soul-crushing burden pushing you through serious mental, emotional, and even physical damage.

But if you’re struggling with debt now, you’re not alone.

And while there are many ways to address debt, it’s sometimes not enough.

If you’ve exhausted all your options such as aggressive budgeting, personal loans, and credit-counseling companies, you may be thinking about filing for bankruptcy.

But this is a very serious matter, and you should understand exactly how it works to determine if it’s right for you.

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So let’s take a closer look at bankruptcy to see how you can make the most out of it.

What Is Bankruptcy?

Bankruptcy is a legal process that can help individuals reduce or eliminate certain kinds of debt such as credit card and medical bills.

There are many types of bankruptcies, but the most common for individuals with unmanageable debt are Chapter 7 and Chapter 13 bankruptcies.

Chapter 7: This process involves giving up your assets such as property and stocks to pay off some of your debt and get the rest eliminated—legally referred to as discharged or forgiven. The court designates a trustee to sell your non-exempt assets and use the proceeds to pay your creditors.

Chapter 13: In this process, a court-appointed trustee will work with you and your creditors to come up with a monthly payment plan based on your income and financial situation. The process typically takes three to five years and could end with you paying off some of your eligible debt, while the rest is discharged.

So which is right for you?

Chapter 7

You may seek Chapter 7 bankruptcy if you have unmanageable debt, but also own assets that can be sold to pay some of it off. However, you can still file for Chapter 7 bankruptcy if you have no assets.

While bankruptcy can eliminate your obligation to pay off the mortgage or car loan, it can’t guarantee you get to keep the property tied to it.

But you can request to keep your property, such as your vehicle. In some cases, a creditor may allow you to keep your ride if you pay all or some of your car loan. You must get a written agreement from the lender and file it with the court before any debts are discharged to be approved for keeping this unsecured property. This process is known as reaffirming a secured debt.

Here’s how it works. Add your total gross income earned during the six months before filing. Then divide this total by six to get your monthly average. This monthly average must not exceed your state’s median income for a household of the same size in order to pass.

If you don’t pass, you can file more paperwork to deduct eligible expenses from your income to show you can’t pay off your debts.

If you move forward with Chapter 7 bankruptcy, the process officially begins when you petition the court. This is when you file your paperwork with the bankruptcy court in your jurisdiction.

This will also kick off the automatic stay, which prevents your creditors from contacting you to collect debts and block moves such as wage garnishment.

After the filing process, the court opens an estate, which technically owns your non-exempt property. The court also appoints a trustee to work with you and your creditors.

The trustee then sets up a meeting involving you, your creditors, and your lawyer to oversee your financial situation and determine if you’re eligible for Chapter 7 bankruptcy. Keep in mind that you will be placed under oath during this meeting.

If you qualify, you then work with your trustee to begin the liquidation process. This is the selling of your non-exempt assets to pay your creditors.

This bankruptcy process involves paying off some or all of your debt through a court-approved repayment plan. In some cases, the eligible debt remaining after you’ve completed your payment plan could be discharged.

This monthly payment plan is negotiated with your creditors and depend on your financial situation.

A court-approved trustee then schedules a meeting between you, your attorney, and your creditors to review your finances and determine your repayment plan.

Keep in mind that within the first 30 days of filing, you’ll need to start making payments to your trustee that is sent out to your creditors. This is required even if the court has yet to approve your payment plan.

That typically happens during your confirmation hearing.

If you miss payments, the court can dismiss your case and you’ll be on the hook for all unpaid debt.

And as with Chapter 7, you’ll need to complete a financial management course before the court can discharge any debt.

Consequences of Bankruptcy

After a lengthy bankruptcy process, you could come out the other side debt free. But you’ll still face some hurdles.

For instance, bankruptcy can deliver a serious blow to your credit, because going through the process means that you were at one point unable to pay your debts. One of the most important factors to determining your credit score is whether you’ve made timely payments.

But before you file, you should hire a qualified bankruptcy lawyer. This professional can give you peace of mind and guide you through the complicated process of filling out paperwork, meeting requirements, and working with the courts.

And remember that during the meeting with creditors, known as the 341 meeting, you are placed under oath. This means you could face legal consequences for willingly providing false information.

And bankruptcy isn’t free. You may incur fees for filing paperwork with the courts, getting credit counseling, working with an attorney and more.

Bankruptcy can wipe the slate clean so you can work on sticking to a budget, avoid spending beyond your means, and eventually build stellar credit.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.