How Does Bankruptcy Affect The Economy – The right time to file for bankruptcy is usually after you have exhausted all other options to meet your financial obligations but are still unable to pay your debts. For example, if you have a lot of debt you can’t pay, you’re behind on your mortgage and at risk of foreclosure, or you’re getting a bill call, it may be time to file for bankruptcy.
Bankruptcy can often reduce or eliminate your debt, save your family, and keep creditors away from you. But it can also have serious financial consequences, including long-term damage to your credit score. This, in turn, affects your ability to borrow money in the future.
How Does Bankruptcy Affect The Economy
Bankruptcy cases are handled in federal courts, and federal law defines six different types. The two most common types used by individuals are Chapter 7 bankruptcy and Chapter 13 bankruptcy. Chapter 11 bankruptcy applies primarily to businesses.
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Chapter 7 bankruptcy, which most individuals file, is also called a straight bankruptcy or liquidation. A court-appointed trustee can sell some of your assets and use the proceeds to partially repay your creditors, after which your debts will be considered discharged.
Certain types of property may be exempt from liquidation, subject to certain restrictions. This includes your car, clothing and household items, trade tools, retirement savings and some of your home equity. When you file for bankruptcy, you must list the property you claim as exempt property.
Chapter 13 bankruptcy creates a court-approved plan that requires you to pay off all or part of your debts within three to five years.
Some of your debts can also be paid off. Since Chapter 13 bankruptcy does not require you to liquidate your assets, you can keep your home as long as you continue to make the agreed-upon payments.
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Certain types of debt generally cannot be discharged through bankruptcy. These include child support, alimony, student loans and certain tax obligations.
There are several steps involved in filing for bankruptcy. Failure to do so may result in your case being dismissed.
Before filing for bankruptcy, you must complete a credit counseling session. An advisor should review your personal situation, provide advice on budgeting and debt management, and discuss alternatives to bankruptcy.
Filing bankruptcy means filing a bankruptcy petition and submitting financial statements showing your income, debts, and assets. You will also be asked to submit a means test to determine if your income is low enough to qualify for Chapter 7.
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If you do not qualify for Chapter 7 bankruptcy, you must file for Chapter 13 bankruptcy. You must also pay an application fee, although this fee is sometimes waived if you can prove you can’t afford it.
You can obtain the required forms from the bankruptcy court. If you hire a bankruptcy attorney (which is usually a good idea), they should be able to provide these as well.
After the documents are filed, the bankruptcy trustee assigned to your case will convene a meeting of creditors, also known as a 341 meeting for those parts of the bankruptcy code that require it. For the person or company you owe money to, this is an opportunity to ask about your financial situation and your repayment plan, if any.
The bankruptcy judge will decide your case based on the information you provide. If the court finds that you tried to hide assets or committed other fraud, you may not only lose the case but also be sued.
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After you file for bankruptcy but before paying off your debts, you should participate in a debtor’s education program, which provides advice on budgeting and money management. Likewise, you should receive a certificate confirming your participation. You can obtain a list of debtor education institutions from the bankruptcy court or the Department of Justice.
Assuming the court rules in your favor, your debt will be paid off in your Chapter 7 case. Chapter 13 will create a repayment plan. Debt cancellation means creditors can no longer try to collect on your debt.
Bankruptcy can have a significant negative impact on your credit history. A Chapter 7 bankruptcy will remain on your credit history for 10 years, while a Chapter 13 bankruptcy will typically remain on your credit record for 7 years.
There are also limits on how often debts can be repaid through bankruptcy. For example, if you were discharged through Chapter 7 bankruptcy, you must wait eight years before filing for bankruptcy again.
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However, because filing for bankruptcy is complex and must be done correctly to be successful, it is generally unwise to attempt to file without the help of an experienced bankruptcy attorney.
Negotiating with creditors without involving the courts can sometimes benefit both parties. Creditors may agree to a repayment plan to reduce your debt or spread your payments over a longer period, rather than risking nothing.
If you can’t make your mortgage payments, it’s worth calling your loan servicer to learn about your options to avoid filing for bankruptcy. They may include:
If you owe money to the Internal Revenue Service (IRS), you may qualify for a compromise offer that allows you to pay less than you owe the agency. In some cases, the IRS also offers monthly payment plans for taxpayers who are unable to pay their entire tax liability at once.
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Be wary of unsolicited offers from companies claiming to save your home from foreclosure. They may be nothing more than liars.
Bankruptcy laws exist to help people who have unmanageable debt due to large medical bills or other unexpected expenses. But it’s not an easy process, and it can have a negative impact on your long-term financial health.
Before filing for bankruptcy, explore all your options and prepare for negative consequences. If you decide bankruptcy is your only viable option, remember that your credit will be affected for years, but the negative effects are not permanent.
Bankruptcy can eliminate many types of debt, but not all types of debt are eligible for discharge. For example, student loans generally do not qualify for bankruptcy unless you meet certain additional conditions, such as proving that repayment of the loan will result in discharge.
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Bankruptcy often discharges credit card debt. But before you file for bankruptcy due to credit card debt, talk to your creditors first. They may be willing to negotiate a different amount you must pay to avoid losing the entire debt.
A debt management plan is a plan developed by a credit counselor, you, and your creditors to help you pay off your debt more successfully. Debt management plans typically require ongoing monthly payments, and you cannot take out a new loan while you are paying off your debt.
To minimize negative financial consequences, it’s important to know when to file for bankruptcy. Filing bankruptcy can cause significant damage to your credit history, but it may be the best solution for dealing with debts you can’t repay.
Before filing for bankruptcy, consider consulting with a reputable credit counselor to explain all of your repayment options.
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In the future, by using your credit wisely and paying your bills on time, you can begin to rebuild your credit and gradually emerge from bankruptcy.
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Credit agencies such as Moody’s and Standard & Poor’s try to assess the risk of bankruptcy by issuing bond ratings and credit rating issuers.
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