Bankruptcy has long-term effects that should not be underestimated, yet it can benefit individuals and enterprises who are in debt. It can help people settle a portion of their bills and clear off all or a chunk of their debts. However, while bankruptcy offers some relief, it comes with several drawbacks.
This, however, should not deter you from declaring bankruptcy. A professional Los Angeles bankruptcy attorney can simplify the process by guiding you through the steps and assisting you in understanding the available options for bankruptcy. This blog will help you understand what to expect if you file for bankruptcy.
Understanding How Bankruptcy Works
In real life, bankruptcy is far more serious than a strategy to win a Monopoly game: It's when you appear before a court of law and tell the judge you can't settle your arrears. Then, based on the situation, they can clear all your debts or come up with a payment schedule for you. People declare bankruptcy for various reasons, including divorce, the death of a family member, medical emergencies, or losing a job.
However, filing for bankruptcy is a life-changing event that has far-reaching consequences. It can track you down while you're applying for jobs, launching a startup, or buying a house. Even though to some it may appear to be a "new beginning," bankruptcy only addresses the symptom and not the underlying cause.
It's also vital to note that filing for bankruptcy does not clearly reaffirm debts (when you agree to recommit to requirements of outstanding loans), alimony, child support, student loan, or government debts (penalties, fines, or taxes). If these are your sole debts, bankruptcy isn't the way to go.
Types of Bankruptcy
Although the main objective of bankruptcy is to eliminate debt, not all are made equal. Bankruptcies are classified into six types:
- Chapter 7: Covers liquidation
- Chapter 13: Individual debt
- Chapter 11: Reorganization of corporations or partnerships
- Chapter 12: Involves family farmers or fisherman farmers
- Chapter 15: Applies in ancillary and foreign-related cases
- Chapter 9: It applies to municipalities and their reorganization
Most likely, you'll only be dealing with Chapter 7 (liquidation) and Chapter 13 (individual debt) bankruptcies.
An Overview of Chapter 7 Bankruptcy
Chapter 7 bankruptcy, often termed liquidation, is among the most significant debt-relief alternatives available in the country. It has assisted many people in escaping poverty and establishing a new financial foundation. A trustee appointed by the court oversees the sale of assets to cover your debts. Any outstanding unsecured loan, such as medical bills or credit cards, is usually discharged. As previously indicated, this excludes debts that cannot be discharged in bankruptcy, like student loans and state taxes.
In Los Angeles, the court will not compel the borrower to sell some objects. With Chapter 7, for instance, most individuals are allowed to keep their car, house, and retirement assets, but nothing is guaranteed. A foreclosure cannot be stopped by Chapter 7, although it can be postponed. The only means of retaining items you're owed is by reaffirming the debt. This implies that you're willing to recommit to loan terms and continue to make installments. However, the majority of bankruptcies under Chapter 7 don't involve assets, which implies there is no property worth for sale.
Bankruptcy is only applicable if a judge determines that you do not earn enough to cover your obligations. This judgment is predicated on a means test. The test evaluates your earnings to the state's average and analyzes your financial records to identify whether your disposable income is enough to repay a reasonable portion of what your creditors owe.
If your earnings are too low to cater to the dues, then you qualify for Chapter 7. Note that if you declare Chapter 7, you'll be required to attend a creditors' meeting, where people you owe money to may be able to interrogate you about your debt and finances. Furthermore, you won't be allowed to file for bankruptcy again for 8 years, and your credit report will be updated with Chapter 7 bankruptcy status for ten years.
Pros of Filing Chapter 7 bankruptcy
Bankruptcy is subject to a slew of misunderstandings. However, if done correctly, Chapter 7 can be a "new beginning" for you. Here are some of the perks of declaring Chapter 7 bankruptcy.
Credit Flexibility
If you consider filing for bankruptcy, it means you're in a tight spot, and credit is impossible to come by. Nobody wants to lend money to people who are in debt. Once you're declared bankrupt, it'll be harder to obtain any type of credit. However, your credit rating will recover again after some time. Thus the longer time goes after declaring, the fewer lenders will hold against your bankruptcy status.
You'll eventually be in good condition again with a little work, but the only means to get there is to complete the bankruptcy procedure. Some credit lines are easier to obtain than others. As a result, it may be advisable to enroll in secured credit cards, which can help you build your credit ratings if you pay bills on time each month.
No Debt Repossessions or Collections
Filing for Chapter 7 Bankruptcy instantly halts collection efforts. This compels creditors to halt any wage garnishments, litigation, or phone calls. The bankruptcy court clerk will notify all lenders whose names and contact you provide. There will be no more debt collectors or repossessions to worry about.
In Los Angeles, the Bankruptcy Code allows debtors to keep the majority of their possessions. This property is exempt, which means that the bankruptcy trustee can't sell it to settle off your debts. Most things considered necessary for life, on the other hand, are frequently exempt. Your vehicle, most of your household possessions, including furniture, clothes, and a proportion of your home equity are frequently considered 'exempt.'
Quick and Cheap Processing
Although a Chapter 7 bankruptcy will remain on your credit file for ten years, the entire process, from filing to clearance, should take four to six months. This is a positive factor because the sooner you have your obligations paid off, the sooner you can go back on the road to good credit and a healthy financial future.
Permanent Debt Relief
The indisputable advantage of declaring bankruptcy under Chapter 7 is the debt relief it offers. It can eliminate a heavy toll off your plate in a matter of months. Most unsecured arrears, including personal loans, medical bills, and credit cards, are dischargeable.
Individuals, small startup entrepreneurs, self-employed individuals, and corporations can all file for Chapter 7 bankruptcy. There is no maximum limit that disqualifies you from receiving relief regardless of the amount owed. Individuals should, however, undergo credit counseling from an accredited credit counseling service within 180 days after filing.
Bankruptcy Discharge is Guaranteed
If you've never declared bankruptcy before, meet the means test's standards, and are truthful in your contacts with the court and bankruptcy trustee, you could get your discharge in as little as three months. It's virtually automatic so long as you complete all standards before and after declaring your bankruptcy case.
Reestablish Your Credit Score
Missed monthly bills and other negative entries on your credit file no longer affect your credit score after declaring bankruptcy. When you're declared bankrupt, you get a clean slate on which you can improve your credit and raise your credit ratings. Most people have a better credit rating 1 year after declaring Chapter 7 than they did the day they started the process.
Cons of Filing Chapter 7 Bankruptcy
Although the repercussions of bankruptcy are not as harsh as they formerly were, there are still risks involved. Bankruptcy can clear the slate, however, there are regulations in place to ensure that the debtor still takes responsibility for failing to meet his or her obligations. These are some of the drawbacks of filing for Chapter 7 bankruptcy:
Loss of Property
According to uscourts.gov, Chapter 7 bankruptcy defines as follows:
"This chapter of Bankruptcy Code addresses liquidation, which involves the selling of a debtor's non-exempt assets and the transfer of the proceeds to lenders."
"Non-exempt" is the keyword. This essentially means that you'll be able to keep the majority of what you require to survive. You may, however, be required to release some property, luxury items topping the list. If you have a vacation home or a second car, you won't be able to hold on to them for long.
Negative Effect on Your Credit Report
A bankruptcy will affect your credit record for ten years. This makes it more difficult to access credit, forcing you to postpone making important purchases. After you file for bankruptcy, it will be difficult to buy property, apply for a credit card or even return to school. Just bear in mind that these consequences are only temporary, though long-lasting.
Expenses to Expect
Filing for bankruptcy requires a $245 case fee, as well as a few other administration costs. You can, however, settle these in up to four installments. Just bear in mind that the last payment should be received 120 days after the case is filed. If your earnings fall below 150 percent of the federal poverty guideline, you may be entitled to have these costs waived.
For debtors who earn more than a certain amount each month, a means test is required. For instance, if your earnings exceed the state's median monthly wage, a means test is necessary to determine whether you are actually in a position that necessitates bankruptcy. If the bankruptcy court determines that your income is insufficient to qualify for Chapter 7, then your case may be advanced to Chapter 13 or get dismissed.
Not Every Debt is Discharged
Some people can't seem to get away from it all. When you declare Chapter 7 bankruptcy, certain debts may remain on your record. You will still be obligated to pay child support or alimony. Unpaid taxes, personal injury expenses incurred as a result of intoxicated driving, and student loan debts are also on the docket.
Chapter 13 Bankruptcy
While Chapter 7 bankruptcy generally results in debt relief, Chapter 13 bankruptcy essentially reorganizes it. The bankruptcy court approves a monthly payment program that allows you to settle a portion of your outstanding debt and all of your secured loans over a three to five-year period. The quantity of your monthly payments is determined by your earnings and the amount of debt owed.
Once a bankruptcy lawsuit is filed, the first payment plan is due thirty days after the date of filing. Once you've completed the duration of your repayment plan, any outstanding dischargeable debts that were not settled during the term period will be dismissed, and you will cease responsibility for paying the debts. In contrast to Chapter 7, this type of bankruptcy allows you to retain your possessions and catch up on any non-bankruptcy obligations.
Chapter 13 can potentially prevent foreclosure by allowing you to catch up on your mortgage payments. Anyone who owes below $419,275 in unsecured debt and $1,257,850.3 in secured debt can petition for Chapter 13 bankruptcy. In addition, you must keep up with any tax returns. However, the court has the authority to place you on a shoestring budget and monitor all of your expenditures. It's worth noting that Chapter 13 bankruptcy stays on your record for 7 years and that you cannot file for one again for another two years.
Pros of Filing Chapter 13 Bankruptcy
There are several benefits of filing for bankruptcy under Chapter 13. Below is an outline of some of them:
Avoid Foreclosure
Perhaps most importantly, Chapter 13 allows people to avoid foreclosure on their houses. Homeowners can halt foreclosure proceedings as well as cure outstanding mortgage payments each month by filing under Chapter 13. Nonetheless, they should continue to make mortgage payments due throughout the term plan and on time.
Flexible Repayment Plan
While it may take longer to settle your obligations, you will have enough time to do it, and bankruptcy trustees may be flexible on payment arrangements. You can reduce the amounts of your installments, spread out your loan repayments, or surrender a piece of property on which you are making payments.
Cosigners' Security
Third parties that are jointly liable with the borrower on "consumer debts" are similarly protected under Chapter 13. In this situation, the co-signers, as they are referred to, may be protected by this provision.
Trustee Handles Your Creditors
Chapter 13 bankruptcy works similarly to a consolidation debt in that the borrower makes plan payments to a bankruptcy trustee, who then distributes proceeds to the lenders. Individuals seeking Chapter 13 bankruptcy protection can have no direct communication with creditors.
Cons of Filing Chapter 13 Bankruptcy
When determining whether or not to file for Chapter 13 bankruptcy, there are a few drawbacks to consider.
Can Be a lengthy Process
Payment schedules for Chapter 13 bankruptcy often take 3-5 years, which is not a quick remedy. However, once the borrower completes the payment plan, the outstanding debts get discharged.
No Privacy
Another disadvantage of Chapter 13 bankruptcy is that everything submitted to the court becomes a public record. This implies that anyone can see how much money you owe and who you owe it to
No Discharge Until Term Ends
Your lawsuit may be canceled if you fail to settle your monthly payment at any time. This is because discharge is not guaranteed until all plan installments are fulfilled. If you do not pay your debts, the trustee will declare your obligations re-collectible.
Have a Consistent Disposable Income
To file for chapter 13 bankruptcy, you must earn enough money consistently to be able to make monthly payments. While any disposable earnings could be utilized to repay your outstanding debts, smaller earnings may appear to be a better fit. However, there are a few obligations you must settle in a plan, such as mortgage arrears and tax debts, and if you do not have enough discretionary income to cover these, your strategy will fail.
How Long Does a Chapter 13 Bankruptcy Stay on a Credit Record?
Any bankruptcy filing may also have a negative influence on your credit ratings for a long period. A Chapter 13 bankruptcy can stay on your credit record for up to seven years. As a result, you may lose all your credit cards. Being declared bankrupt also makes it difficult to obtain a mortgage.
Furthermore, if you filed for Chapter 13 within the last six years, you won't be allowed to declare bankruptcy under Chapter 7. Also, filing for bankruptcy under Chapter 13 can make it much harder to file for bankruptcy under Chapter 7 in the future.
Find a Los Angeles Bankruptcy Attorney Near Me
Even though the bankruptcy procedure is complicated, it has both benefits and disadvantages. However, the repercussions must be taken seriously, and dealing with an experienced and professional bankruptcy attorney is important to ensure a smooth and quick process.
We at Los Angeles Bankruptcy Attorney can assist you to navigate the bankruptcy process and limit the negative impact of bankruptcy on your credit score. Call us at 424-285-5525 to talk with one of our professionals for more information.
