Filing for bankruptcy isn’t ideal, but it doesn’t have to be all bad. Read on for some bankruptcy facts about the positive side of filing.
While unemployment rates were up by the end of 2020 thanks to COVID, bankruptcy filings were actually down 29.7%.
Even so, that still means that over half a million people filed for bankruptcy in 2020, so if you are considering bankruptcy—you need to know you are not alone.
There are downsides to bankruptcy but understanding how it works and how the pros of bankruptcy may balance out the cons, may help you figure out if filing bankruptcy is the right choice for you.
Basic Bankruptcy Facts
When a person or business is unable to pay their debts, they may choose to file for bankruptcy. In general, bankruptcy involves discharging certain debts to relieve the individual or business’s financial strain and help them recover.
Chapter 7 vs Chapter 13 Bankruptcy
Chapter 7 and Chapter 13 are the two most common ways of filing bankruptcies for individuals. There are other categories specifically for businesses.
Filing Chapter 7 bankruptcy means that you are requesting the complete discharge of your eligible debts. If you qualify, any assets considered a luxury would be sold and the funds would be used to pay your creditors as much as possible.
Filing Chapter 13 bankruptcy means that you will be given a reasonable payment plan to pay what debts you can afford over a 3–5-year period, with the remainder discharged at the end. These payments will be managed via an escrow account by a third party.
Cons of Bankruptcy
The word bankruptcy tends to feel like a dirty word. Considering it likely makes you feel guilty and shameful because of how our culture looks at it.
Let’s take the shame out of the equation and just look at the facts. We’ll start with the cons, the negative consequences. The unknown feeds negative feelings, so understanding the cons may help you feel better about bankruptcy in general.
Stays on the Public Record for 7 Years
This is the reason that makes bankruptcy feel like a big no-no. Who wants their failings out in the public domain for the world to see?
Here’s the deal: the only people who would actively look for bankruptcy on your record are potential creditors. Not your friends or your next-door neighbor. Employers who run a background check may see it but are not allowed to discriminate against you because of it.
A bankruptcy will make it harder for the first few years to secure debt for car loans and the like, and you will likely have higher interest rates and lower limits.
Does Not Eliminate All Types of Debt
It is possible, but very rare, for student loans to be discharged. Check out our blog post about bankruptcy and student loans for more information.
Filing bankruptcy will not allow you to discharge any debts related to child support, alimony, or recent tax debt.
There are Income Limits
You will have to prove you are within the income limits for your family size to file for bankruptcy. You are required to show proof through a means test to qualify for filing a Chapter 7 bankruptcy.
If you do not pass the means test, you may still be eligible to file Chapter 13.
Pros of Bankruptcy
While the negative impacts of filing bankruptcy do affect you long term, there are pros to filing that may balance them out. Take a deep breath and let’s look at how bankruptcy might be able to help you.
Permanent Debt Relief
This is the biggest pro and the reason you are likely reading this post. Yes, you will receive permanent debt relief from any loans and debts discharged by your bankruptcy.
Immediate Relief from Creditors
If you are at a point where you cannot pay all your current bills and creditors are calling you, filing bankruptcy will offer a reprieve.
As soon as you file bankruptcy paperwork, an automatic stay goes into effect. This means that creditors are not allowed to call you seeking payment until court proceedings are through.
If they do, you (as their debtor) can sue them.
There are circumstances where your creditors can apply to have the automatic stay lifted.
You Can Keep Your Belongings
Most personal belongings are exempt from being taken in bankruptcy. You will be able to keep your home, needed vehicles, furniture, and your personal belongings.
There are some exceptions to this including, but not limited to, luxury items such as boats or snowmobiles. If there are recent luxury purchases, such as jewelry or high-end items, on credit cards that you are filing to be discharged, you may lose those items.
Clean Slate
Once your bankruptcy is complete, you can move forward with a clean slate. Yes, it may be harder to secure debt for a little while. But you will not have the burden of insurmountable debt hanging over your head.
Can Help Your Credit Score
Wait, what? You were wondering why this wasn’t listed in the cons section with the credit history information, weren’t you?
Here’s the thing. If you are at the lowest point where you are considering filing for bankruptcy, your credit is likely already shot.
You may take a temporary hit with the initial filing and discharge, but once your bankruptcy is finalized, all the negative hits to your credit history will be erased. The bankruptcy is the only thing that will still show.
So, your credit score can actually begin to recover at that point without late payments or defaults showing.
Considering Bankruptcy? Let Us Help
The burden of insurmountable debt can feel impossible to overcome. Understanding basic bankruptcy facts can help you decide if bankruptcy might be a good option for you.
If you are ready to talk to someone and decide if filing bankruptcy is right for you, contact the bankruptcy lawyers at Husker Law at 402-415-2525.
