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Bankruptcy can be a scary concept to some people, but the truth is it is a powerful financial tool that has enabled countless Americans to manage their debt and build better financial futures. Still, numerous myths about supposed dangers or pitfalls of bankruptcy persist, unfortunately keeping people who might benefit from the institution from ever giving it a fair shot.
The truth of the matter is bankruptcy will not be right for everyone. However, if you have overwhelming debts you are struggling to repay and see no relief in your future, you should consider exploring whether bankruptcy might help you get your life back on track. We have previously covered some of the basic myths on our website, but this post will go into greater detail about both broad and specific misunderstandings that continue to spread.
This is absolutely not true! We have published several blog posts going into thorough detail about how bankruptcy can potentially impact your credit, but you should understand upfront that a bankruptcy will not stay on your credit report forever. It will stick for quite a few years, but that does not mean you will not be able to start rebuilding credit and recovering that score in the meantime.
A Chapter 13 bankruptcy will remain on your credit report for up to 7 years. A Chapter 7 bankruptcy will stay for up to 10 years, in part because there are no direct repayments involved. That may seem like a long time, but again, you will be able to take steps to boost your credit much sooner.
Look, the reality is filing for any type of bankruptcy is going to damage your credit. It just is, and there is no getting around it. However, that can be a small price to pay for discharging unsecured debts and benefitting from the automatic stay.
If you had a good to very credit score prior to filing for bankruptcy (basically anything above a 670), you can expect to be dinged 130-200 points. The reality is if you are contemplating bankruptcy, your credit is likely much lower. Not paying your debts will, over time, increasingly damage your credit score.
In many situations, filing for bankruptcy can actually be the first step to credit recovery. As we mentioned above, your bankruptcy will stay on your credit report for a number of years, and you will get that initial hit. From there, though, things can often only improve. Most filers should be able to take steps to substantively improve their credit within 2-4 years of their bankruptcies.
In order to do this, you will need to be careful in the financial decisions you make in the wake of your bankruptcy. Taking out new loans is not recommended, as you will likely be subject to less than favorable terms as a result of your record. Instead, consider obtaining (and regularly paying) secured credit cards and revolving accounts. You should also be proactive in positive information (like accounts paid on-time) to the credit bureau.
This is absolutely not true. There are two types of consumer bankruptcy – Chapter 7 bankruptcy and Chapter 13 bankruptcy – which take radically different approaches in their relief structures and impacts on one’s estate. As an individual, you will likely only qualify for one or the other, and it is crucial you understand the differences on how they might impact your financial situation.
Chapter 7 bankruptcy is often called “liquidation bankruptcy” and is intended for persons who do not have sufficient disposable income to repay a portion of their outstanding debt. To qualify, your average income must fall below Illinois’s average median income for your household size. If your income exceeds that threshold, you may still qualify, but you will have to undergo the state’s Means Test. This means subtracting qualifying expenses to determine your monthly level of disposable income. If a bankruptcy court feels your disposable income is high enough, you may instead be asked to file for Chapter 13 bankruptcy.
If you do end up qualifying for Chapter 7 bankruptcy, your nonexempt assets will be “liquidated” – or sold – to help repay your creditors. When this process has been completed, you will be permitted to discharge unsecured debts. You also keep any property that was exempted from liquidation.
Chapter 13 bankruptcy, or “reorganization bankruptcy,” is meant for individuals who can pay back some of their debts. You will undergo that same Means Test to determine your level of disposable income. From there, a bankruptcy court will restructure your outstanding debts into a single monthly payment, the amount of which will be decided based on your ability to pay, not the total sum value of your debt. You will be expected to make this monthly payment over a period of 3-5 years. If you complete the payment plan, you get to discharge unsecured debts. Unlike Chapter 7, there is no liquidation, so you will not lose anything during the bankruptcy process.
Chapter 11 bankruptcy is intended specifically for businesses. This enables businesses struggling with debt to reorganize their finances and help save their companies. In many cases, a business can continue to operate while going through Chapter 11 bankruptcy.
Understanding how each type of bankruptcy operates and what impact it could have on your situation is critical to getting the most out of your bankruptcy. An experienced bankruptcy lawyer can evaluate your assets, identify what bankruptcy you might qualify for, and whether it makes sense to proceed at the present moment.
This is not true and can quickly get people into trouble. Bankruptcy bestows numerous benefits to filers, but you will not be able to simply absolve yourself of all kinds of debts, no matter what type you complete.
Completing a Chapter 7 bankruptcy or Chapter 13 bankruptcy will generally entitle you to discharge unsecured debts. This distinction is important to understanding how to best leverage your bankruptcy filing. Unsecured debts refer to those that do not have any collateral attached; the loans were only given based on your credit and the lender’s confidence that you will repay.
Types of unsecured debt include:
Secured debts, meanwhile, do have collateral attached. These types of debts can generally not be discharged in a bankruptcy, though there are some exceptions. Several other types of debt can also not be typically discharged.
Types of debts you are generally not able to discharge in a bankruptcy include:
If a majority of your debt is secured debt, you will need to be cautious in how you proceed with a bankruptcy. In some circumstances, you may be able to successfully discharge student loan debt or tax debt if you meet certain conditions. A qualified bankruptcy attorney can help you understand which of your debts will qualify for dischargement.
If the bulk of your debt stems from your mortgage, student loan debt, or missed vehicle payments, you may be wondering if there is any point in considering bankruptcy. While it is true you will probably not be able to discharge those types of debts by completing bankruptcy, filing could still give you the tools and relief you need to reorganize your finances.
An important element of any bankruptcy filing is the automatic stay, a court order that forbids any further collection actions taken against you. This includes foreclosures, vehicle repossessions, wage garnishment, and calls from creditors. The stay lasts for the duration of your bankruptcy; if you file for Chapter 13 bankruptcy, that means you could be protected from collection actions for up to 5 years!
The whole point of bankruptcy is to enable you to figure out your finances. In other words, you will get a period of time to catch up on payments and eventually discharge some debts. If your debt is a combination of credit card bills and missed mortgage payments, for example, bankruptcy could prove extremely useful. You may be able to discharge the credit card debt upon completing the bankruptcy. Without your unsecured debt to worry about and the extra time to gather funds, you will likely have more financial ability and flexibility to get on top of your mortgage, even though you cannot directly discharge debts related to those missed payments. All the while, creditors will be unable to harass you or attempt to foreclose on your property thanks to the automatic stay.
If you have a large amount of secured debts, it is worth speaking with a bankruptcy lawyer to discuss how different bankruptcy strategies might be used to find you relief. You should not simply assume that bankruptcy cannot help you because you cannot instantly discharge certain types of debt.
This is in no way true. If you qualify for Chapter 13 bankruptcy, this is a complete nonissue, as none of your property will be subject to liquidation in the first place.
It is possible you will lose some nonexempt property to liquidation if you file for Chapter 7 bankruptcy. The key word here is “nonexempt.” Using federal or state exemption schedules, you are permitted to “exempt” a certain amount of property from liquidation across several categories.
Chapter 7 bankruptcy exemptions exist in the following categories in Illinois:
In other words, you will be able to protect up to a set amount of equity or value from liquidation in each category. If you are married, you may be able to double certain exemption limits if you file together.
A bankruptcy attorney can help you strategize on how best to maximize the power of each exemption while limiting or even eliminating impact to your estate. Every situation is different, but many Chapter 7 bankruptcy filers are able to avoid losing any significant amount of property.
This is not necessarily true. You generally have the option to file for Chapter 7 bankruptcy or Chapter 13 bankruptcy jointly, with your spouse, or separately, on your own. Whether it makes sense to file jointly depends on the nature of your debt.
If the bulk of your debt is rooted in accounts, bills, or other loans that are jointly held, it may make more sense to file for bankruptcy as a couple. To discharge the unsecured debt, you will both need to take responsibility for the liability of what you owe.
If only you individually take on a great deal of debt, separate from your spouse, you may want to consider filing alone. You are in no way required to file for bankruptcy together unless you are attempting to discharge debts held together. For example, if you have your own individual credit card and rack up exorbitant debt on specifically that card, filing bankruptcy alone will shield your spouse from the process and specifically target your debt.
With that said, there can be situations where it is advantageous to file for bankruptcy together with your spouse. In cases of Chapter 7 bankruptcy, many liquidation exemption category limits are doubled when filing jointly.
Look, no one is really looking to file for bankruptcy in the first place, much less more than once. The goal of bankruptcy is to get on top of your finances, discharge debts holding you back, and prepare you for a steadier future.
Sometimes, though, life happens. A huge contributor to bankruptcies is medical debt, meaning a completely unavoidable and unanticipated injury or ongoing illness could land you in the hospital with mounting mental debt. Some other unexpected crisis could force you to put more purchases than you would like on a credit card.
Yes, you can file for bankruptcy more than once, though there are limitations in place. What is important to remember that filing for bankruptcy does not mean you are an irresponsible person – even if you have to file for a second time. Bankruptcy is a lifeline for people in impossible scenarios, and you should always consider any tool that can help you.
If you have filed for Chapter 7 bankruptcy before, you must wait 8 years before filing again. Technically, you can file for Chapter 13 bankruptcy every 2 years. However, you cannot have two bankruptcies open at once; because Chapter 13 bankruptcy reorganizations typically last anywhere from 3 to 5 years, you will in practice only be able to file again once the previous payment plan has been completed.
Misinformation and misunderstanding can cloud how people think about bankruptcy. The truth is it helps thousands of people find better futures every year, and, depending on your situation, it could help you manage overwhelming debt. Our team at Bach Law Offices, Inc. are prepared to help you understand all of the legal options available to you and debunk any misconceptions you might have about bankruptcy. Our bankruptcy lawyers have over 40 years of combined legal experience and are well-versed in all areas of bankruptcy law. Our goal is to always help you find a better financial future and protect your rights throughout the bankruptcy process.