What Does it Mean to File Bankruptcy? 11 Things To Consider Before Filing

Bankruptcy is another form of insolvency, meaning the debtor cannot pay their debts. This typically happens when they cannot afford it because of an unforeseen hardship. Deciding whether or not to file bankruptcy is a major decision that can bring many challenges.

An individual files to be bankrupt for protection to stop creditors from coming after their assets and wages or seizing their property like a house or car. Some people file for Chapter 7 liquidation if they have enough money set aside. To file bankruptcy, you should get professional advice.

How Much Debt Do You Have to Have to File For Bankruptcy?

The amount of debt you have is not the only factor in determining whether you should file bankruptcy. Another thing is your circumstances and your ability to pay back creditors.

Filing to be bankrupt can be stressful, so it is essential to understand the consequences of this decision well in advance. There are a lot of legal documents to sign and deadlines to meet, but above all, it’s your life on the line. You face a hard choice but it could also save you from financial ruin.

Chapter 7 Bankruptcy

First, realize that filing for Chapter 7 bankruptcy does not discharge all your debts. For the creditors to be forced to accept a bankruptcy filing, you usually have to file a motion to dismiss (which is required). This will prove that you, as an individual, cannot pay off your debts in full. Some of the most common reasons people file bankruptcy are medical bills and lack of money.

However, these debts are not discharged immediately after filing. The reason is because if they declare you bankrupt; it is impossible for you or anyone else to pay your debt. Otherwise, these debts would be paid at some point, anyway.

Consequences of Bankruptcy

Also, you should know that your credit score is likely to be affected once you file bankruptcy. If you are eligible to have the process dismissed, creditors may accept this proposal and allow you to continue paying back your debts at a slow pace.

The consequences of filing for Chapter 7 bankruptcy are that all your assets become the court’s property. This means they will auction them off to pay off some of your debt. You will also not be allowed to acquire any credit without consulting an attorney first (which is required).

When Should I File for Bankruptcy?

There are many reasons to file bankruptcy, but the most crucial factor is your financial situation and how well you can handle it. If you have a lot of debts that you cannot pay back, and they are likely to stay this way in the future, then it might be time to think about filing for protection.

The time when you need to consider filing is when you realize that there’s no use in trying to save money because all your assets have been spent. When this happens, as long as creditors won’t accept your payment plans, they will start putting collection notices on your property and may even take legal action against you.

You need to weigh the consequences of filing to be bankrupt against the effects of being declared bankrupt.

Weigh all the Options

If you get caught up in a difficult financial situation and see no light at the end of the tunnel, or if your creditors won’t listen to your payment plan, then filing to be bankrupt is probably your best course of action.

You must evaluate all good and bad things that could happen when considering this route. A common misconception is that simply filing to be bankrupt will solve all your problems. This is not true.

For example, if you are evicted from your house, then the fact that you filed to be bankrupt may not protect you in this situation. It is still up to the landlord to prove that they own your home, so it will probably go up for sale or be held as a foreclosure property.

If this happens, creditors will try to get their money, and you will probably have much higher payments on your credit card debts than before.

Do I Need to File Bankruptcy?

Whether you require filing for bankruptcy protection can be answered in two ways. First, there are the legal requirements, so you must meet all the criteria set in the law to be eligible. Second, your financial obligations and ability to pay back the creditors might mean that filing is required. Some of the most common reasons people decide to file to be bankrupt include:

  • Student loans. If your monthly payment of student loan debts is larger than 20% of your monthly income, this is one of the main reasons you should consider filing Chapter 7 bankruptcy.
  • Medical bills. Medical debts are the second most common reason for filing bankruptcy in the United States. When you cannot make payments on the debt, you can consider this option.
  • Credit cards and mortgages. Credit card debts and mortgage debts are much more difficult to deal with, but filing could be a solution if you cannot find another way out of your financial troubles. However, you must realize that creditors will try harder to take your possessions when they see that you have filed for bankruptcy protection. They may even move to dismiss in court, or they might take your house away while filing is still pending.
  • Automobile loans. Auto loans are much easier to refinance, but if you have trouble paying the monthly payments, then filing might be the only way out.

After choosing to file bankruptcy, the next major thing you should consider is your strategies. There are a few things that you could do after filing, but you must realize what your options are and what each of them could mean for your future finances.

Building Credit After Filing

Filing to be bankrupt means that your credit score will drop significantly, and sometimes, it might bottom out at 300 or even 200 points. Besides this, creditors will take any assets that were not protected in court and auction them off. So make sure you empty all your bank accounts as soon as possible.

Because of the significant damage to your credit score, it is unlikely that you will acquire a new loan or start a new credit card account shortly. Likely, most lenders will not even talk to you at all, so this means that your only option is to build up your credit by carefully using the one account to pay off your debts.

The best way to do this is to get an account from a different lender and use it responsibly. You can use this account to purchase things like groceries, household goods or rent an apartment. Other things that you can’t buy under bankruptcy protection include furniture, major appliances, and travel.

Limits on Creditors

Filing for bankruptcy gives you a lot of freedom to deal with your creditors, so you can determine how much they may receive. However, it is essential to realize that when you file bankruptcy, you will not necessarily be protected you from all creditors, so certain people could still make things difficult for you.

For example, if someone buys your house or has registered a lien against it (a mortgage), they will still be able to take legal action against you.

If you have been avoiding making payments on your debts for so long that you can’t afford them anymore, then some of your creditors may give up and sue for a lesser amount. Sometimes, they might even decide to settle with you as long as you file bankruptcy.

For example, if you owe $15,000 but want to pay only $12,000, it may be easier to settle with the creditor rather than wait until the case goes to court and risk losing everything. However, they will give up because they know they could get more money by bringing a case against you in court.

Dealing with Creditors During Chapter 13

If you decide to file Chapter 13 bankruptcy, then you’ll need to deal with creditors even after you’ve completed the payment plan. Chapter 13 involves a three- to five-year payment plan for your debts, so you will have to make regular payments and stick with the program.

However, even though creditors know they could get money from you someday, they still want to receive something now. This means that they will call and harass you by e-mail, text messages, and phone calls until they receive the money they are owed.

Advice From a Lawyer

To file bankruptcy is no simple thing. It is a legally complicated process that could take up significant time. You might have to deal with creditors for months or even years after filing. Therefore, it is essential to speak with a lawyer before deciding whether to file bankruptcy. A professional can explain all the details of bankruptcy and help you determine if filing this type of paper is necessary.

In addition, if you decide to file bankruptcy, please seek the advice from an attorney who specializes in bankruptcy. Although they charge a fee; they are well worth it to ensure things are done correctly, according to law and they will have your back even after the bankruptcy is discharged.