Life does not always go according to plan. You might need to take on debt that your ability to pay it off each month was too great. Now you are wondering how to get your financial situation back in order.
Due – Due
Knowing when to file for bankruptcy is a valuable skill for individual consumers and small business owners. Learn more about it and determine if it’s the best move for your financial needs.
What is bankruptcy?
Bankruptcy is a legal process started by people who have too much debt. They must sign a federal petition taking into account their outstanding financial obligations or debts before asking their creditors to work with them to settle their debt with any remaining assets.
What are the types of bankruptcies?
People can build up too much debt as individual consumers or business owners, so there are numerous types of foreclosures to handle those situations. These are the specific chapters outlined in the US Bankruptcy Code that you should consider if you find yourself unable to repay debts.
Chapter 7: Individual Liquidation
Most people who need to immediately file for bankruptcy because of personal debts will file under Chapter 7. A federal court appoints a trustee to help the person sell real estate to repay lenders or creditors. You can claim specific property exempt from Chapter 7 bankruptcy, such as your car, pension or equity.
Chapter 11: Reorganization Bankruptcy
Small business owners may be able to file for Chapter 11 bankruptcy to reorganize their assets, business, and debt. If the set of these factors is more than $5 million, an examiner intervenes to guide you through the process.
This can be a helpful step for entrepreneurs as it allows the business to remain open and operational while restructuring takes place. Creditors can also propose a Chapter 11 bankruptcy if the debtor doesn’t come up with the idea first.
Chapter 13: Asset Maintenance and Repayment Plan
People who sign up for Chapter 13 bankruptcy can keep their assets, but must repay their debts within three to five years of their plan’s approval by the court. You don’t have to liquidate anything if you don’t miss or skip any payments. Most of the people who don’t get approval for this bankruptcy are employees with no reliable sources of income.
When to file for bankruptcy as an individual?
Before filing for bankruptcy, it is essential to negotiate with your debtors or creditors. They will still get their money back if there is a way for you to make long-term payments and ultimately pay off your debt more efficiently.
Sometimes debtors negotiate for that reason. However, they may not do so if they don’t see a viable path forward because of your financial history or situation.
When negotiation isn’t possible and you’re on the brink of losing your home or other essential assets because you can’t make the monthly payments, it may be time to file for bankruptcy. First, schedule a credit counseling session to get the appropriate certificate for your requested type of bankruptcy.
A counselor will review your assets and liabilities during that session and find the best solution for your needs, even if that isn’t bankruptcy. You can find these experts by contacting federal credit agencies.
You may worry that your property or existing net worth will not be enough to pay off your debts. If so, your top credit facility will work with your credit advisor to prepare a financial solvency plan to help clear the remaining debt. By working out the necessary changes, your minority lenders will follow the top decisions if they: make the plan in good faith.
When to file for bankruptcy as a company?
When debtors fail to negotiate with small business owners about their loans, it may be time to file for bankruptcy. Usually this would mean a Chapter 11 case, which has a few pros and cons for people running small businesses.
You can take advantage of this kind of bankruptcy if your creditors or debtors do not meet to discuss new contract terms. Instead, the federal case would bring everyone to the same table to discuss options such as extended payment terms for real estate, equipment or manufacturing loans.
Small business owners also don’t have to immediately liquidate their businesses or assets to pay off the debt. Instead, they can remain open and operational because Chapter 11 prioritizes repayment plans approved by federal courts. A trustee becomes the facilitator who oversees the pending payments after both parties agree on the terms.
Small business owners are hesitant to file for bankruptcy because it can become an expensive, lengthy process. Depending on the court’s calendar and how easily debtors agree to payment plans, you can pay an average of $19,738 just for filing and attorney fees.
In addition, you must make initial payments within the first few months of your plan agreement. That can be a challenge after paying legal fees as you go about your day-to-day business.
How to file for bankruptcy
There are many steps involved in filing for bankruptcy. Familiarize yourself with the process before making any final decisions.
1. View your options
Remember that bankruptcy may not be necessary in your situation. Forgiving debts such as student loans and unpaid taxes will provide relief as you go to consolidation or settlement. you need you financial history and credit report paperwork to make the best decision.
2. Choose the type of bankruptcy
If you decide bankruptcy is right for you or your business, you should choose from Chapter 7, 11, or 13. Individual or corporate bankruptcy is the first way to narrow your options. After that, you can decide based on the value of your assets, outstanding debts and current income.
3. Decide on finding a lawyer
The American Bar Association and state associations have lists of attorneys ready to help people file for bankruptcy. Legal aid clinics and free services can also help if you can’t afford legal aid but do want representation.
The ability to represent yourself is also called pro se. You don’t have to pay attorney fees, so you save most of the filing fees. However, you may not get the debt relief you need. A recent study found less than half of pro se cases resulted in debt forgiveness, while 93.9% of the agencies represented did.
4. Pass a credit advice course
Anyone filing for bankruptcy of any kind should take a credit counseling course. It helps people weigh their options to determine the best course of action, whether that be bankruptcy or other forms of debt relief. If you completed your class more than 180 days before submission, you will need to retake it closer to your official submission date.
5. Fill out your advice and legal forms
After meeting with credit advisors and completing your course, you will be required to complete all related forms. There are many involved in bankruptcy, so be prepared for this step that will take some time. The forms contain your financial history, statements, fees and other related information. Your attorney can help you if you choose to get representation.
6. Pay Fees and File Forms
Your paperwork also comes with a lot of costs. There are filing fees, administrative work, and even fees if a trustee oversees payment arrangements with your debtors. Sometimes people can get a waiver of these fees, but only if their income is 150% below the poverty line determined by a federal court.
7. Negotiate with your creditors
Whether you appear in court or not, your creditors will sit down with you after you have paid your fees and filed all necessary paperwork. They will look at your situation and determine the best way to repay your debts. All agreements made on this point are legally binding, as the meeting takes place under oath.
8. Take debtor education lessons
You must take post-file courses if your lenders forgive your debts. This guarantees that you have learned how to better manage your finances based on your academic performance in the classes and tests. You must pay the tuition and obtain the final certificate to complete your bankruptcy.
What life looks like after submitting
What will your life look like after your bankruptcy? It depends on how you file a report and your situation.
Chapter 7 bankruptcies remain on credit records for ten years after both parties settle the outstanding debt. On the other hand, a Chapter 13 bankruptcy only lasts seven years.
You will also lower your credit score no matter how you decide to apply. That can make it more difficult or impossible to get money from insurance companies and investors if you need to expand your business or recover from an emergency.
If you’re faced with significant debt immediately after bankruptcy, you may have to carry it on your own for years. There are limits to how often people can file specific bankruptcy chapters.
Debts that do not count towards bankruptcy
You may not need to file for bankruptcy if you owe money for ineligible reasons. Here are a few types of debt that federal courts don’t count in bankruptcy filings:
- Open utility bills
- Personal loans
- credit card debt
- Medical bills
- payday loans
- Overdue rental bills
Contacting legal representation or credit advisors will help you determine if your debt qualifies for bankruptcy or if you need alternative solutions.
Know when to file for bankruptcy
Knowing when to file for bankruptcy is essential to: manage your finances. It can make things rosier or not be part of your future. Talk to an expert to see if this is the best way to manage your debt while preserving your personal or professional life.
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