Understanding Bankruptcy: Can You File?
While it's always better to pay off your debts in full, sometimes mounting debt can become too much to manage and push you into an impossible situation.
In that case, bankruptcy serves as a last resort that will allow you to make a fresh start.
While filing for bankruptcy is a solution for many people in bad financial situations, you must be able to qualify for either a Chapter 7 or Chapter 13 bankruptcy. This guide will help you determine which option is best for your situation and what to do with your fresh financial start.
Filing Chapter 7 Requires Passing a Means Test
A Chapter 7 bankruptcy is often the most desirable form of debt relief because it involves discharging or dismissing all of your unsecured debts. Typically, any assets you own will be seized by the court and liquidated to relieve some of your creditors. Anything else will be discharged.
In recent years, federal laws have been updated to ensure only those in severe financial distress can qualify for a Chapter 7 bankruptcy, so a means test has been initiated.
In order to pass the means test, your monthly income cannot equal or exceed the average income for families in your state. If you fail the means test, the court will assume you have enough money left over each month to pay your debts off, and that will disqualify you from declaring bankruptcy.
Can You Qualify for Chapter 13?
If you believe you will fail a means test, professional bankruptcy lawyers recommend their clients file for Chapter 13 bankruptcy. This is different from Chapter 7 because your debts are not discharged. Instead, you and your attorney will have to draw up a payment plan that consolidates your debts under the court’s supervision.
There are a few requirements you’ll have to meet in order for the court to allow a Chapter 13 filing. First, you’ll have to show that you have a regular source of income that will enable you to meet the obligations of a repayment plan. Additionally, the plan must be structured to ensure your debts will be fully repaid in three to five years.
The court also restricts the amount you can seek in debt relief. You can owe no more than $394,725 in unsecured debt and no more than $1,184,200 in secured debt. You are also not allowed to have filed for Chapter 7 over the last four years or a Chapter 13 within the past two years.
What to Do After Filing for Bankruptcy
Even though your debts have been discharged, you may still have some work to do in rebuilding a good financial profile. This will likely include attending a court-ordered credit counseling course. You should also make a habit of checking your credit reports with the three main credit bureaus to make sure your debts have been discharged.
Any remaining debts should be paid off as quickly as possible but be sure to make all the minimally required payments on time. Just one late payment can destroy your credit rating and sabotage any progress you have made so far.
Even though a Chapter 7 stays on your credit report for 10 years and a Chapter 13 stays on your credit report for seven years, you can start rebuilding your credit score immediately. In addition to paying debts on time, getting a secured credit card can help you establish good credit sooner.
You can also help your credit score by maintaining lower balances on any credit cards you still have. All of these methods can be combined to show lenders that you’re a low risk client, while also boosting your credit score over time.
Following this guide can help you start a new life for yourself, but, if you don’t learn financial responsibility, you’ll end up right back where you started. Even if a bankruptcy judge doesn’t order it, taking a personal finance course can give you a more thorough understanding of the concepts related to financial responsibility. When you complete the course, you’ll know how to build and maintain good credit, which is one of the keys to obtaining a better financial flexibility.