When an individual or an organization fail to pay their debts to creditors, they may go to the bank to seek financial relief for some or all of their debts; this legal process is termed as a Bankruptcy. After a person declares himself as bankrupt a court order decides how an insolvent debtor will deal with unpaid obligations. During such times the individual is expected to pay the creditors by selling off his assets and trying to erase debts that can’t be paid. The debtor’s credit rating is severely damaged during bankruptcy and his ability to borrow for years decreases drastically.
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Even though bankruptcy is a powerful debt relief tool, but it should be thought after and carefully used when it makes sense for your financial situation.
The types of bankruptcy filings are as follows:
Chapter 7: Often referred to as straight banking over here most of your unsecured debts and some secured debts by surrendering your assets. Unsecured debts are debts not secured with collateral, including most personal loans and credit cards.
Chapter 11: It is the most complex and expensive form of bankruptcy proceedings. These are usually filed by businesses but individuals with a lot of debt who do not qualify for Chapter 7 or 13 are eligible for Chapter 11.
Chapter 13: Here you try to eliminate your debt by creating a repayment plan to pay back all or a portion of what you owe over three or five years. This type works well if you can afford to pay some but not all your debts.
There are a few important steps that need to be considered before filing for bankruptcy.
Step 1: Find a Good Attorney
It is highly important to find a good bankruptcy attorney with a good lawyer, also make sure you are comfortable with the attorney firms working. Collect all your documents to better understand your financial state.
Step 2: Conduct a Bankruptcy Counselling Session
Complete the pre-filing counseling that happens before you file bankruptcy paperwork with the courts. During the session make sure you discuss your budget, pros, and cons of bankruptcy as well as typical alternatives
Step 3: Filing for Bankruptcy With the Court
At this point, creditors must stop calling you or making attempts to collect on your debt since bankruptcy appears on your credit report. This happens because bankruptcy invokes an “automatic stay,” which stops all legal activities from taking place the moment the bankruptcy is filed. Pay your filing fees to the federal court.
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Step 4: Liquidation or Repayment
The next step may involve liquidating any assets of value to repay your creditors (Chapter 7) or repaying a portion of your debt (Chapter 13). The timeline varies depending on your type.
Step 5: Complete a Debtor Education Course
Individuals should take this course from Ann approved credit counseling agency to educate oneself on making smart financial decisions. Make sure to file your certificate of completion with the court.
Step 6: Debt Discharge
In this step, your eligible debts are discharged finally and your obligation to pay creditors included in the bankruptcy are wiped off. The process of rebuilding your credit starts now.
How it will affect the Credit Score:
Upon filing for bankruptcy, the individual’s credit score will be affected immediately. Unfortunately, bankruptcy won’t disappear overnight from the credit reports. It will have a negative impact on the credit score as long as the bankruptcy appears on the credit report.
A bankruptcy filing may seem like a great solution to debt-related problems. However, there are consequences that one needs to be aware of. Being informed of these repercussions can help to decide whether this is the best option.
Author: Mahek Medh
About the Author: Currently, I am in my second year and over the period of time I have realized that I enjoy learning about numbers and money, and I find topics of Finance very interesting thus this is the domain and space where I wish to etch my long term career.