No one plans to get into financial trouble. However, things happen in life, and sometimes you end up with more debt than you can handle, and you have to make tough choices. That’s when it’s essential to know what happens when you file for bankruptcy.
What Is Bankruptcy?
Bankruptcy is a legal process designed to alleviate the burden of someone who has amassed a lot of debt and does not have the resources to pay it off. Bankruptcy is a tool for people who find themselves in financial trouble. It is essentially a lifeline to help someone get back on track by eliminating, reducing, or restructuring their debt.
Some advantages of bankruptcy include:
A do-over to reset your financial situation and forge healthier habits.
All your creditors must stop collections, and you can breathe easier knowing the debt is off your plate.
You can sometimes retain assets like your home and your car.
Regardless of whether the poor financial situation is due to lousy decision-making or just rough circumstances, the court will assess each situation separately. Bankruptcy is usually a last resort for someone in financial trouble because it comes with a downside as well as the relief brought by absolving the debt.
How Does Bankruptcy Work?
Both businesses and individuals have the right to file for bankruptcy, and there are a few different options within the umbrella of protection. According to Debt.org, “In 2020, bankruptcy filers owed $86 billion and had assets of $56 billion. Most of those assets were real estate holdings, whose value is debatable.”
Essentially what happens when you file for bankruptcy in the courts puts a hold on all your debts, and creditors cannot continue attempting to collect on them until the matter is resolved.
A court-appointed representative works with the person in debt and evaluates their income and liabilities to determine if bankruptcy is feasible and how to proceed.
The court may discharge the debts (meaning the person no longer has to pay them). Or the court may decide that the person does have the means to pay off their debt and may assist in working out a payment plan.
The process includes compiling and reviewing your financial records. The court also requires that you seek the help of a credit counselor (at least 180 days) before filing for bankruptcy. You must use an approved credit counseling agency when taking this step. Then if you have exhausted all other avenues of financial help, you can file a petition for bankruptcy with the court. Once the courts have accepted your bankruptcy, your court-appointed trustee will set up meetings between you and your creditors to work out the terms of repayment and allow the creditors to ask questions. The creditors may or may not attend, but you are required by law to be there.
The court will review everything and then offer you credit counseling and a plan to eliminate or restructure your debts.
How to File for Bankruptcy?
If you think you might need to file for bankruptcy, use this calculation before deciding: can you pay off your debts within five years? If the answer is no, then you might be eligible to file for bankruptcy.
You can file for bankruptcy yourself or hire a bankruptcy attorney to help you. However, because the laws can be complex and you won’t want to make a misstep, it might be helpful to get some assistance.
What Happens When You File for Bankruptcy?
Although bankruptcy can be a much-needed lifeline and give you peace of mind, it also comes with a severe downside that you should consider before going down this road.
So, what happens when you declare bankruptcy? First, all your creditors must stop calling and harassing you. Second, your debts are dissolved or reduced. Third, you may end up being on a new, more affordable payment plan with some of them.
There are also some pretty negative aspects to bankruptcy as well, and they are:
Your credit report will be affected for 7 to 10 years.
If you need to acquire financing or loans, you are looking at paying much higher interest because you are now more of a risk. Some lenders won’t agree to finance you.
You may have to continue credit counseling to learn how to manage your finances better.
How Long Does a Bankruptcy Stay on Your Credit Report?
Unfortunately, when you file for bankruptcy, it damages your credit severely. The notation that you filed for bankruptcy and your debts were discharged by the courts stays on your credit report for seven to ten years!
You may also have to sell personal assets like artwork, jewelry, and real estate to liquidate the assets to pay off some of your debt.
A poor credit rating and bankruptcy can affect your ability to get financing, buy a home, acquire insurance, and even get a job with some companies.
Ten years is a long time to suffer the consequences of poor financial decisions and mountains of debt. If there is any other way to handle your overwhelming financial situation, try and find one.
How Much Does It Cost to File for Bankruptcy?
When filing for bankruptcy, you may have to pay filing fees along with attorney’s fees. If you cannot afford an attorney, check with your local Bar Association, they can sometimes provide legal access and resources for free.
According to Debt.org, the average person who files for bankruptcy (depending on the type of bankruptcy) will pay between $1,500 - $4,000 in filing and legal fees.
Some fee breakdowns from Debt.org are:
Chapter 7 Total Filing Fees: $338
Filing fee: $245.
Administrative fee: $78.
Trustee Surcharge: $15.
Re-opening a Chapter 7 filing: $260.
Chapter 13 Total Filing Fees: $310
Filing fee: $235.
Administrative fee: $78.
Re-opening a Chapter 13 filing: $235.
Average Attorney Fee for Chapter 7 Bankruptcy: $1,450
A 2016 Martindale-Nolo study revealed that the average national average cost was $1,450 for Chapter 7 cases. The cost depends on where the case is filed. Chapter 7 fees generally range from a low of $1,000 to a high of $1,750. Of course, every case is different, and a number of factors can affect the cost of your case.
Average Attorney Fee for Chapter 13 Bankruptcy: $3,000
The Martindale-Nolo study showed an average of $3,000 for Chapter 13 cases, with ranges from $2,500 to $5,000. Chapter 13 fees are often governed by the bankruptcy court in the particular district, so fees vary widely from district to district.”