Filing for bankruptcy isn't fun, but it can also mean a fresh start. People who are drowning in debt and unable to make their payments should strongly consider it.
Your financial life is bound to be full of ups and downs. One day you’ll be celebrating a raise with a lovely dinner at a fancy restaurant only to have your car break down on the way home. The cost of the repairs wipes out the raise and then some, and now you’re worse off than when you started.
Sometimes you end up with multiple downturns in a row.
As your debt grows, eventually it will get so big that you can no longer afford your payments. Forget paying that personal loan off ahead of schedule, you can’t pay it off on-schedule! Once your money situation gets bad enough, you’ll find yourself without many options.
One of your few remaining options, however, could be filing for bankruptcy.
And while bankruptcy sounds scary, the option exists to help you. So when should you consider bankruptcy? And what comes next you if you do decide to declare it?
What is bankruptcy?
Before we get into whether you should consider declaring bankruptcy, let’s just make sure we understand what it is. We’ll only address personal bankruptcy in this article, of which there are two primary kinds.
The two main types of personal bankruptcy are Chapter 7 and Chapter 13. Chapter 7 allows you to discharge almost all of your debts, but you’ll have to pass a means test first to show your income is too low to actually pay those debts. You’ll also have to hand over whatever liquid assets you have to pay off as much debt as possible before it’s discharged.
If your means are too great to pass the means test, you could still declare Chapter 13 bankruptcy. Chapter 13 bankruptcy will require you to submit a payment plan to a bankruptcy court, and if it’s approved, you’ll be able to pay off those debts over the next three to five years.
So how do you know if it’s time for you to declare bankruptcy?
How to know it’s time to declare bankruptcy.
Declaring bankruptcy isn’t as easy as the television would have you believe. Every situation is different, so it’s important to examine whether bankruptcy is the best option in your personal situation. Ideally, you’ll want to consult a bankruptcy attorney to give you guidance.
“In general, bankruptcy is a legal action in federal court meant to protect the consumer from his or her creditors,” explained Todd Christensen, education manager for Money Fit by DRS, Inc. “Most commonly, filers are trying to protect their home from foreclosure, but they may also be attempting to protect their vehicle (which is often a bad financial move) and, more importantly, their wages from garnishment.
“If a consumer cannot pay their bills on their own, cannot negotiate better repayment terms with their creditors, and cannot work out a debt management plan with a nonprofit credit counseling agency (like those found at FCAA.org), bankruptcy is usually the next—and last—step.”
If you do think bankruptcy could be right for you, there are a few steps you’ll have to go through.
“Meet with a credit counseling agency approved by the US Department of Justice’s Executive Office of the US Trustee to complete a budget briefing and obtain the required certificate of credit counseling,” outlined Christensen. “The thought back in 2005 when Congress added this and other requirements to the bankruptcy filing process was that meeting with a credit counselor might hopefully steer some consumers away from bankruptcy if it was not necessary, and have them instead pay off 100 percent of their debts through a credit counselor.
“If bankruptcy is still the most logical step, the consumer either meets with a bankruptcy attorney or completes the court paperwork (each district court has its own fees required to pay with the petition, as well as its own fee waiver policies).
“After the case is filed, the consumer must attend the 341 meeting of the creditors. Before the case is discharged and the consumer is relieved of his or her responsibility to pay the debts, he or she must complete a 2-hour debtor education course approved by the same US Department of Justice office.”
And then you’ll have declared bankruptcy.
So now what?
You’ve successfully declared bankruptcy. What comes next?
Leslie H. Tayne Esq., Founder and Head Attorney at Tayne Law Group, offered some actions to take and suggestions for living that post-bankruptcy life:
“Bankruptcy stays on your credit report for up to 10 years, which could make getting new credit difficult for that period of time. Your credit score will definitely take a hit from filing bankruptcy, but how much it drops will depend on your individual situation. If you had good credit before filing, bankruptcy will likely have a more profound impact on your credit than if you had poor credit. It will take time for your credit to recover from bankruptcy. You may consider opening a secured credit card to start rebuilding.
“If you have accounts discharged during bankruptcy, they will now have a zero balance but will show up as discharged on your credit report, which may be frowned upon by lenders and creditors. However, ‘discharged’ will likely be looked upon more favorably than an account that’s marked as unpaid or past due.
“After you’ve filed for bankruptcy, you’ll need to get back on track and adjust to your new financial situation. The first step will be to sit down and rewrite your budget. Your budget may have been the root of the problem that led to bankruptcy in the first place, so you’ll want to think critically and carefully when reviewing it. Take time to identify where the issues may have been and what you may be able to do to improve in those areas now that you have a chance for a fresh start.
“Because you may have had trouble managing your finances previously, you may want to enlist some help after bankruptcy from a financial attorney or a financial expert to help you avoid falling back into the same habits.”
You still have rights.
Aside from the more general advice, there’s also a specific law you may want to familiarize yourself with.
“Much of my practice consists of suing creditors and debt collectors for violating bankruptcy discharge orders or consumer protection laws, including the Telephone Consumer Protection Act (TCPA), Fair Debt Collection Practices Act (FDCPA), Fair Credit Reporting Act (FCRA), and state consumer collection practices laws,” explained consumer protection attorney Donald E. Petersen.
“Consumers who have discharged a debt in bankruptcy and surrendered any collateral securing the debt should not be receiving calls or letters from the creditor (or debt collector) about the discharged accounts.
“The TCPA requires that companies using an Automated Telephone Dialing System (ATDS) or prerecorded or artificial voice when calling a cell phone must have the cell phone user’s prior express consent. Consumers who file bankruptcy typically provided the caller (or the caller’s principal or predecessor in interest) express consent by furnishing their cell phone number to the creditor.
“If a creditor (or debt collector) continues to call about a debt that the consumer discharged, the consumer should tell them ‘stop calling me’ rather than ‘call my bankruptcy attorney.’ Here is why.
“Many, if not most, bankruptcy courts will require the discharged creditors to pay the consumer very little compensation for the aggravation that the creditor’s constant calls and letters continue to cause. The TCPA, however, provides that once the borrower revokes consent (i.e, tells the caller ‘stop calling’) the caller is liable for $500 per call and, if the violation is willful, an additional amount of up to $1,000 or, equivalently, $ 1,500 per call.”
Going into bankruptcy is never going to be fun. But if you’ve exhausted every other option, it can be the beginning of a brand new start.
Author and Accredited Financial Counselor®, Todd R. Christensen, MIM, MA, is Education Manager at Money Fit by DRS, Inc. (@MoneyFitbyDRS), a nationwide nonprofit financial wellness and credit counseling agency. Todd develops educational programs and produces materials that teach personal financial skills and responsibilities to all ages. Having facilitated nearly two thousand workshops since 2004 on the fundamentals of effective money management, he based his first book, Everyday Money for Everyday People (2014), on the discussions, tips, stories and ideas shared by the tens of thousands of individuals and couples in attendance.
Donald E. Petersen is an Orlando, Florida trial lawyer who represents consumers against companies who violate their rights under the Telephone Consumer Protection Act, Fair Debt Collection Practices Act, Fair Credit Reporting Act and other consumer protection laws.
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