Filing bankruptcy is considered a tough break in the eyes of the average person. It has a negative, even scary financial connotation. While it’s true that bankruptcy does have its downsides, it can also offer a fresh start, debt relief, and an alleviation of financial stress. Of course, it’s important to consider whether or not bankruptcy is the right choice for you. To find out, speak with an experienced Louisville bankruptcy attorney at O’Bryan Law Offices. For a consultation, please call 502-400-4020 or fill out our online intake form today.
What Is Bankruptcy?
Before you can determine whether or not a bankruptcy filing is the best option, you should understand what exactly it is. Filing for bankruptcy is actually a legal process in which a person or company is unable to pay their current debts. The person in debt (debtor) files a bankruptcy petition to start the bankruptcy process. Then, their assets are evaluated and measured. The value of those assets may be used to pay off creditors and current debt.
It is handled in federal courts, and the United States outlines the rules of each chapter of bankruptcy in the US Bankruptcy Code. There are many different “chapters” of bankruptcy, with two of the most common being Chapter 7 and Chapter 13. While it does offer a fresh financial start, it stays on your credit report for several years. This sometimes makes it difficult to borrow money after you file bankruptcy.
What Are the Consequences of Bankruptcy?
Even after you receive your final discharge, you’re likely to experience some negative consequences after you file for bankruptcy. Each bankruptcy chapter has its own specific consequences, which we outline below.
Chapter 7 bankruptcy requires that you allow a federal court bankruptcy trustee to help you sell all your nonexempt assets to pay all your debts. The money you make from certain assets allows you to then pay your creditors. When you receive your discharge, the balance you still owe on existing debts is discharged. That means you don’t owe money on them anymore. However, you still have to pay certain debts and debt collectors. You must still pay any court-ordered alimony, child support, taxes, and even student loans.
Chapter 13 bankruptcy is a little different. Instead of selling your assets, you keep them. In exchange, you work out a repayment plan to make monthly payments. This results in you either partially or completely repaying your debts. You can negotiate the payments with your creditors, the court, and your Kentucky bankruptcy attorney. The payment may span over a period of three to five years. When you finally finish your payment plan, you receive a bankruptcy discharge regardless of whether you have completely repaid your debts.
All types of bankruptcy affect your credit record negatively. However, chapter 13 is slightly more favorable than chapter 7 bankruptcy. For starters, it’s much easier to keep at least some of your assets. Additionally, chapter 13 cycles off your credit report around 7 years after the discharge. You can also file chapter 13 again in as short a time as two years.
What’s the Better Option: Chapter 7 or Chapter 13?
Bankruptcy is one of the most efficient strategies to achieve debt relief for both secured debt and unsecured debts. It also helps with tax debt, credit card debt, and stopping collection efforts from creditors through the automatic stay. Most people who file bankruptcy elect for either chapter 7 bankruptcy or chapter 13 bankruptcy.
The best option for each person depends heavily on their specific assets, personal property, and financial circumstances. Below, we list three situations in which filing for bankruptcy might be a good choice for you.
- You have monthly consumer debt payments which exceed 50% of your monthly income.
- Your creditors are hounding you or threatening lawsuits.
- You see no clear path to paying off your debts in the next 5 years.
Most of those filing for bankruptcy choose chapter 7 bankruptcy because it tends to be faster and less expensive. Additionally, most filers also qualify for chapter 7 after taking the means test. The means test examines your income and familial obligations to establish eligibility. Eligible debts include your medical bills, mortgage or car loan, personal loans, and more. Federal student loans, child support, and other financial obligations do not qualify for a discharge.
If your take-home pay is too high to qualify for chapter 7, you may qualify for chapter 13 bankruptcy filings. Also, some who still qualify for chapter 7 choose chapter 13 anyway. This is because of chapter 13’s allowances to keep certain property and catch up on your home mortgage. These filings, however, have their own difficulties. All discretionary income past a certain allowance must go toward your payment plan.
How Long Will It Take My Credit Score to Rebound?
After the conclusion of your bankruptcy, your credit score might not increase significantly for anywhere from one month to two years. However, the more work you put into raising your credit score, the better off you’ll be. O’Bryan Law Offices offers credit counseling in Kentucky for those who need a little help boosting their credit score.
Is My Bankruptcy a Public Record?
Technically, yes. Everything you file with the help of your bankruptcy lawyer through the bankruptcy court is public record. One of the cons of filing is the availability for anyone to see it if they care enough to jump through the hoops. However, most people don’t bother putting in the work. Finding and viewing those records takes more than a few minutes, and you have to know someone with a password to the online records. Therefore, it’s also extremely unlikely that anyone who didn’t already know about your bankruptcy would simply stumble upon it.
Will My Employer Find Out About My Bankruptcy?
If you file chapter 7, it’s unlikely that your employer will ever know. If you file chapter 13, however, they will likely receive a notification. This is because your chapter 13 payments come out of your paycheck. Keep in mind that federal and state laws prohibit employers from discriminating against employees because of filing for bankruptcy. Aside from your creditors, it’s unlikely that anyone will know if you declare bankruptcy unless you tell them.
Can I Keep My Car?
You may keep your automobile if you file for Chapter 7 bankruptcy and local bankruptcy rules enable you to exclude all of the equity you have in it as long as your loan payments are timely. You’re also exempt if the market price of a car you own fully is less than the exemption limit.
Deduct your current loan debt from the car’s worth to find out how much equity you have in it. Due to the rapid depreciation of automobiles, you may not have much equity until you’re towards the conclusion of your loan term.
Start by looking at your state’s motor vehicle exemption after you’ve calculated how much equity you have in your car. The automobile is protected if you have less equity than the exemption level.
Will I Lose My Home?
A Chapter 13 bankruptcy filing will block a foreclosure and require the lender to accept a repayment plan that allows you to make up the missing payments over time. To make this plan work, you must show that you have adequate income to pay off previous debts and keep up with future payments.
If you retained your home during the bankruptcy procedure, you can keep it thereafter as long as you pay your mortgage. It’s possible that once you’ve paid off all of your other debts, you’ll be able to comfortably afford your mortgage payments. If that’s the case, you’ll be able to keep your home.
Are There Advantages to Filing for Bankruptcy?
Yes! The biggest advantage in a bankruptcy case is obtaining a fresh start for your financial life. Many people filing bankruptcy receive a bankruptcy discharge from most of their unsecured debts. Depending on the chapter you decide on, you can keep certain assets, although state laws vary widely on the amount you can keep. It is also illegal for an employer to fire you just because you’re filing for bankruptcy.
As soon as you file for bankruptcy under Chapter 7 or Chapter 13, collection activities must cease. There is an immediate stay in place as soon as your petition is filed, which prevents most collecting action. If a creditor persists in attempting to collect the debt, he or she may be charged with contempt of court and compelled to pay damages.
The hold extends to whatever loan you may have taken out to purchase your automobile. It’s doubtful that your creditor will take action if you keep making payments. If you skip payments, your creditor will most likely file a petition to have the stay lifted so that they may seize the vehicle or renegotiate the loan.
Is Bankruptcy a Good Way to Reduce Debt?
Filing for bankruptcy might be a great treatment if you have significant debt troubles. With limited exceptions, it stops most collection operations, including phone calls, wage garnishments, and lawsuits. It also removes a variety of debts, such as credit card debt, medical expenses, personal loans, and more.
It does not, however, halt all creditors or eliminate all responsibilities. You’ll still have to repay your student loans, as well as back payments for child support, alimony, and most tax payments, unless you can establish a hardship.
How Much Cash Can I Keep?
Filing bankruptcy doesn’t mean you have to give up everything you own. Some cash and other property that receives exemptions are yours to keep. Unfortunately, most states don’t allow you to keep much. However, you can use a wildcard exemption to protect a pretty significant portion. Speak with a bankruptcy law attorney to determine the extent of your exemptions.
Contact a Louisville Bankruptcy Attorney Today
If you’re struggling to pave the way for your financial future, filing bankruptcy, drowning in car loans and total debt, you need an attorney as soon as possible. At O’Bryan Law Offices, we aim to achieve a positive attorney client relationship while helping you with future finances. To achieve good credit and improve your financial situation, we encourage you to not be afraid to file for bankruptcy. For more information about credit counseling or bankruptcy, please call our office at 502-400-4020 or fill out our online intake form.