The process for declaring bankruptcy is a critically important element of our financial system. Giving businesses and people the ability to discharge debts under certain circumstances breathes fresh life into them and earn a second chance in our system. When it comes to financial success, taking risks and hoping for the best is part of the game, and many of us make wrong decisions or are dealt a bad hand.
However, there are repercussions to declaring bankruptcy, and there are considerations to be made first. Declaring bankruptcy is never an easy choice, and depending on your options and circumstances, it may mean parting with possessions and assets we had planned to hold onto for years and decades.
Bankruptcies Are Complicated
On the surface, the bankruptcy process is not too complicated. You go to court, file the necessary paperwork, they either dissolve any non-exempt assets or write up a repayment plan, and you’re sent on your way. But bankruptcies take a long time to resolve.
- Chapter 13 bankruptcy takes three to five years depending on the size and complexity of the case.
- Chapter 7 bankruptcy can still last four months to half a year.
- Chapter 11 bankruptcy takes two or more years.
Bankruptcies are not simple, nor are they cookie cutter processes. If you’re getting ready to file one, you have to be prepared to spend quite a lot of time making your case before your debt is discharged (and you might not even get all of your debts discharged).
Central to a bankruptcy is the paperwork – particularly bankruptcy forms. These forms are complex and long and must be filled out extensively. They require intimate knowledge of the inner workings of your finances, demanding a lot of knowhow you may not have.
The main reason to seek the help of a bankruptcy attorney is to seek legal advice on how to fill these forms out without missing something important. They can also help you avoid certain pitfalls that may just lead to a heavier bill later. On that topic:
Bankruptcies Are Costly
Ironically, bankruptcies can be quite expensive. They’re less expensive if you go through the entire process on your own – but this is generally unrealistic, as there are easily missable details and crucial forms that must be filled out, lest you risk drawing the process out even further or accidentally not declaring something (this wouldn’t count as fraud, but it would introduce further delays).
The most recent statistics indicate that out of the 488,506 Chapter 7 bankruptcies filed in the last fiscal year, nearly every single one had their debt successfully discharged (94.3 percent). On the other hand, those who filed for Chapter 13 bankruptcy are generally less successful.
Note, however, that the unsuccessful cases are usually dismissed because the judge or trustee feels that the person petitioning for bankruptcy has enough assets to deal with their debts normally. A bankruptcy attorney will play an important role in ensuring that your bankruptcy process goes over smoothly.
On top of that, different Chapters require different filing fees. For example, the filing fee for a Chapter 7 bankruptcy is $335, while the filing fee for a Chapter 13 bankruptcy is $310. Some bankruptcies will end up costing you up to several thousand dollars, in the form of filing and attorney costs.
Bankruptcy and Your Credit Score
The costs of a bankruptcy ultimately extend past the process itself. Naturally, whenever someone goes bankrupt, this affects their likelihood of receiving a loan or a credit. In other cases, it will make it more likely for your to be targeted by unsavory creditors seeking to charge a much more hefty premium for an extension of your credit, or those seeking to help you out of the hole after bankruptcy with payday loans.
While it takes debtors an average of two years to recover from a Chapter 7 bankruptcy, it may take longer for your credit score to recover, and it will certainly take longer for your bankruptcy to disappear from your credit reports. This is something you will have to be proactive about, especially if you even plan to take out a sizeable loan for a business or a home.
To improve your credit score, seek out small amounts of credit that are feasible and realistic to pay back with your current wages, and never bite off more than you can chew. After all, the last thing you need right now is more debt.
Declaring Bankruptcy Does Not Dissolve Shared Debt
One important thing to note is that an individual declaring bankruptcy is only removing themselves from a debt, rather than eliminating that debt outright. If you share a debt with someone else – for example, if you cosigned a loan – the other person with whom you were sharing that debt will still need to account for their portion, as well as the rest of the debt. If this leaves them struggling financially with no realistic option to pay back the debt, they too will need to consider a debt solution such as declaring bankruptcy.
Declaring Bankruptcy Does Not Always Discharge All Debts
In any bankruptcy case, there is such a thing as “dischargeability”, which describes a debt’s ability to be discharged. As the term implies, not all debts can be forgiven. You must closely examine your case to figure out what debts were and were not discharged.
Non-dischargeable debts are typically made so if a creditor decides to file a lawsuit in order to challenge the debt’s dischargeability, thereby calling upon a judge to declare a specific debt discharged or non-dischargeable based on the argument made by the creditor.
Others cannot be discharged in a Chapter 7 and Chapter 13 bankruptcy as per the bankruptcy code, such as:
- Court costs
- Retirement plan loans
- Debts not listed in your bankruptcy paperwork
- Certain penalties and fines from criminal activity
- Specific taxes
- Child support/alimony
- And more
Be sure to consult with a bankruptcy attorney to determine what debts are likely not going to be discharged after your bankruptcy, either due to the law or creditor interference. When all is said and done, bankruptcy can be costly and take months (for a Chapter 7) to years (for a Chapter 13). But there are circumstances wherein all this trouble is worth it, particularly if you can potentially discharge all your debts and take up a clean slate.