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Financial hardship can happen to anyone. Whether you kept making money mistakes throughout your twenties, came upon hard times in your career, or ran into unaffordable medical bills, having the slate wiped clean probably sounds pretty appealing.
But bankruptcy requires sacrifices and comes with serious consequences, so it’s important to rule out any alternatives and to go into the process armed with information. Once you understand what bankruptcy entails, you can decide which money moves will best insulate you against future financial distress. Here’s what you need to know.
It costs money to file for bankruptcy
You may be filing for bankruptcy because you’re broke, but you’ll need to free up some cash for the costs. If you’re wondering how much it costs to file for bankruptcy, that depends on your income and whether you choose to hire a lawyer.
For Chapter 7 bankruptcy, there’s a $245 filing fee, a $75 administrative fee, and a $15 trustee fee, all of which can be paid in installments and may be waived if your income is below 150% of the poverty line. For Chapter 13 bankruptcy, there’s a $235 filing fee and a $75 administrative fee, which can both be paid in installments.
You must also take two educational courses, which will cost a maximum of $50 each. If your income is below 150% of the poverty line, you may request that the course provider waive the fee. But what really adds up are the legal costs. You can expect to pay about $1,500 for an attorney unless you choose to file yourself or with the help of Upsolve’s nonprofit bankruptcy filing tool. Note that if your case is complex, it’s probably a good idea to hire a lawyer.
There are a few types of bankruptcies
There are six types of bankruptcies, but the most common types individuals will encounter are:
- Chapter 7 bankruptcy, which involves a court-appointed trustee who handles liquidating your assets to pay your debts. You may be able to keep some exempt property, depending on the state you live in. Most of your remaining debt will be discharged, which leaves you with no obligation to pay your creditors unless you have secured loans or student loans that don’t qualify. However, to be eligible, your income must be low enough relative to your debt.
- Chapter 13 bankruptcy, in which the court provides a monthly payment plan to get you on track so you don’t have to give up your property. This prevents foreclosure, which allows you to pay your delinquent mortgage payments over time. It also stops debt collectors from calling and protects your co-signers from collection efforts. Any individual can file for this type of bankruptcy, as long as their unsecured debt does not exceed $394,725 and their secured debt does not exceed $1,184,200.
Bankruptcies impact your credit for years
Chapter 7 bankruptcy stays on your credit report for 10 years, whereas Chapter 13 bankruptcy gets wiped off your credit report after seven years. For both, all included accounts will be deleted seven years from the original delinquency date.
If you have excellent credit, expect a huge drop in your credit score after filing for bankruptcy, which can seriously hurt your ability to access new credit. But if you’re hurting financially, it’s likely you already have some missed payments or accounts in collections that are negatively impacting your score. If that’s the case, you may notice a less drastic dip in your score, according to FICO.
Considering other alternatives makes sense
If you’re struggling with how to pay off debt, bankruptcy isn’t your only option. For example, debt consolidation can be an alternative to bankruptcy, but it won’t be appropriate in all cases. If your credit is destroyed and you won’t qualify for a low enough interest rate on a debt consolidation loan, bankruptcy could be your only choice. However, you should also talk to a nonprofit credit counseling agency to find out whether a repayment plan might work for you.
A creditors meeting is required
If you thought Thanksgiving dinner with your family was intrusive to your privacy, you had better be prepared for this. Both Chapter 7 and Chapter 13 bankruptcies require you to attend a meeting of creditors, in which you’ll be placed under oath and required to answer questions about your finances. Anyone you owe money to will be allowed to attend, and the trustee in your Chapter 7 case may also ask you questions. This meeting is also used to ensure you understand any alternatives available to you and are truly prepared for the process ahead.
The process can take a while
Before even filing, you’ll need to complete all the required paperwork and take a credit counseling course. Once you’ve filed for Chapter 7 bankruptcy, expect the process to take around four to six months — it’ll take at least 90 days to discharge your debts, and there are factors that can slow down the process, such as failing to take your debt education course. Creditors also have 60 days to object to discharge, If they do, this can delay the timeline.
If you’re filing for Chapter 13 bankruptcy and your income is less than the state median, you’ll have three years to repay your debts. If your income is greater than the state median for a family of the same size, you’ll have five years to complete your repayment plan. During this time, you can’t take on new debt without consulting the trustee. Your debts are not discharged until you’ve made every payment on time; failure to pay may result in the dismissal of your case unless it was due to circumstances outside your control.
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Not all debts are discharged in bankruptcy
Certain debts are generally not dischargeable in bankruptcy. These include:
- Select unpaid taxes
- Select luxury goods and cash advances obtained 70 to 90 days before filing
- Alimony and child support
- Fees and penalties owed to a court or government entity
- Debt incurred for death or personal injury to others in a DUI
- Debts incurred for maliciously injuring another person or destroying their property
- Debts you didn’t include on your bankruptcy paperwork
- Debts obtained fraudulently
- Certain debts denied a discharge in previous cases
- Homeowner’s association fees
In addition, student loans are not dischargeable unless you can prove that paying your student loan debt would cause “undue hardship” to you and your dependents.
If you’re filing for Chapter 13 bankruptcy, you may be able to discharge debts related to malicious destruction of property, debts incurred to pay taxes, and debts from property settlements related to a divorce agreement. These debts are exempt from discharge in Chapter 7 bankruptcy.
Other debts, including medical bills and credit card debt, can go away with bankruptcy.
A future employer could find out about your bankruptcy
In most states, employers can make hiring decisions based on the information on your credit report. Your employer will be especially likely to run a credit check on you if you’ll be handling sensitive data or financial information as part of your job. Because bankruptcy stays on your credit report for seven to 10 years, a future employer might see it and potentially deem you unfit for a role.
However, some states and cities don’t allow employer credit checks or limit the way they can be used. These include:
- New York City
The process is complicated
Some cases are more straightforward than others. But the bankruptcy code is extremely nuanced, and if you have a complicated case, you might need to seek legal help, especially if you’re trying to have your student loan debt discharged.
Throughout the process, you’ll need to fill out paperwork, attend educational courses, sit for the meeting of the creditors, show up for hearings, etc. It may take time, energy, and financial resources you don’t have. You should learn as much about the process as possible before you decide to file.
You may not be eligible
Although there’s no official minimum amount of debt you need to file, people pursuing Chapter 7 bankruptcy need to prove they don’t make enough income to handle their debts through a repayment plan. And with Chapter 13 bankruptcy, maximum debt limits apply — $394,725 for unsecured debt and $1,184,200 for secured debts.
The bottom line
Bankruptcy is a complicated process that many people feel ashamed to approach. Although there’s nothing wrong with requesting this type of relief when you need it, you should ensure it’s the right decision for you. It may feel like an invasion of your privacy, require a significant amount of your time, and necessitate strict budgeting in the months or years leading up to discharge. It also costs money and impacts your future with regard to borrowing and employment. As such, you shouldn’t make the choice to file until you’ve explored all other alternatives.
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