What Happens When You File Bankruptcy? When someone is suffering from financial difficulty, they generally view bankruptcy as a last resort. A popular (and wrong) assumption is that bankruptcy is just for people who take on too much credit card debt, and while this can be true, people also file bankruptcy after suffering a major, unexpected financial blow—like loss of a job, or a divorce, or a lawsuit or an unexpected illness. While it is true that filing bankruptcy can give you the opportunity to get on top of your financial situation, or in many cases, wipe the slate clean, it is important to understand the pros and cons of filing bankruptcy. Read on to find out more about what happens when you file bankruptcy. First, Who May File for Bankruptcy? In general any person, business, or entity can file for bankruptcy. There is no minimum amount of debt required; however, in most cases, a person who files does owe considerably more in debts than he or she can pay. Depending on the amount owed, there may be restrictions as to what kinds of bankruptcies may be filed. What Happens When I File Bankruptcy? Bankruptcy provides the opportunity to pay down a portion of your debts over time in Chapter 13 (3-5 years) or in Chapter 7 to have some or most of them completely eliminated. In most cases, debts like credit cards and medical debts also get eliminated in Chapter 13. When you file bankruptcy, something known as the “automatic stay” immediately comes into play. The automatic stay is like having a large, scary-looking person standing between you and your creditors. It is an order that keeps creditors from trying to collect. They cannot deduct money from your bank account, garnish your wages or go after any of your other assets (or if they were doing so before you filed bankruptcy, they have to immediately stop), without first getting permission from the bankruptcy court. And that is not necessarily an easy process for them. The stay stops most creditor calls, wage garnishments, and lawsuits, but not everything will stop: creditors can still collect support payments and criminal cases will continue to proceed forward. The automatic stay will stop evictions and foreclosures, at least temporarily. What Happens to My Personal Property? What happens to your personal property (clothing, furniture, cars, bank accounts, retirement, etc.) depends on which bankruptcy chapter you file, Chapter 7 or Chapter 13. Here’s what to expect: Certain property is exempt from bankruptcy proceedings and can be kept by the debtor. In Montana, there is an exemption of $250,000 worth of equity in a homestead. Pension and retirement benefits may also be exempt. In addition, exempt property can include household furnishings and personal effects like tools of the trade, and life insurance. These exemptions, if available, are subject to value limitations. For example, in Montana, you can protect only up to $2,500.00 of equity in one motor vehicle if your name is on the title. Other exemptions may also be available in particular circumstances. The exemptions apply only to equity in real or personal property, which means that if property has been placed as security for a loan (such as a mortgage on a residence or a lien on the title of a car), the availability of the exemption may be limited. Chapter 7 Chapter 7 bankruptcy is often called liquidation or fresh start bankruptcy. This is the most common type of bankruptcy proceeding, and is most often the simplest. In this form, the debtor can retain exempt property (discussed above). All non-exempt property is turned over for sale to pay creditors. Most debts are discharged in a Chapter 7 bankruptcy, meaning that the debtor is no longer legally obligated to pay the discharged debts. Chapter 13 A Chapter 13 bankruptcy, is for individuals with “regular income.” It is sometimes called a “wage-earner plan,” although it is available to people with other kinds of regular income, whether that be from self-employment, welfare, or some additional sources. Under Chapter 13, a debtor has more flexibility in deciding which assets to keep and may be able to extend the time for repayment of debts. In Chapter 13, some of your debts will be reorganized so that you can pay them off partially or in full over the next three to five years. Keep in mind, though, that if you don’t comply with the payment plan, your creditors may be able to go after your assets to satisfy your debts. Will I Be Able to Own Anything After Bankruptcy? As a general rule, there is no limitation on the future ability of a debtor to own or acquire real or personal property. In most cases, creditors whose claims are discharged in bankruptcy will not be able to take property or earnings acquired after the filing of bankruptcy. However, some special types of interests (such as inheritances, property settlements, and life insurance proceeds) if acquired within a certain time after bankruptcy, may become available for payment to creditors. Does My Spouse Have to File With Me? Nope. There is no requirement that a husband and wife file bankruptcy together. In some instances, if most debts are owed by one spouse, it may be appropriate for that spouse to file alone. Jointly owned property, however, may be affected if only one spouse files for bankruptcy. In most cases, a husband and wife have the same debts or co-signed the same loan agreements. If only one spouse files in this situation, the creditors can continue to demand payment from the spouse who did not file. Typically it costs the same whether one or both spouses file. What Happens to My Credit if I Declare Bankruptcy? Bankruptcy may appear on a person’s credit record for ten years and may hamper access to credit for a time. However, a person contemplating bankruptcy may already have a poor credit rating. In some cases, bankruptcy may actually improve the ability to obtain credit, since many of the debtor’s former debts are discharged. Your local credit bureau may be able to provide information about the policy of lenders and creditors in your area with regard to the effect of bankruptcy on a person’s ability to obtain credit.
What Happens When You File Bankruptcy?
- Post author:Nik
- Post published:January 25, 2021
- Post category:Debts / Finances / Lawsuit
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Tags: how bankruptcies work