Consider This: What Does Declaring Bankruptcy Do to Your Debt?

Having to make the decision of whether to declare bankruptcy is never easy. If you are considering filing for bankruptcy, your head is likely spinning with questions. How does declaring bankruptcy affect my credit? Do you get out of all debts if you declare bankruptcy? Will I be able to afford my payments if I declare bankruptcy?

The answer to all these is that it depends on your situation. However, declaring bankruptcy brings a major sense of relief to those who are struggling with debt. By filing for bankruptcy, you take the first step towards getting back on your financial feet. You can eliminate all or some of your debt and start to rebuild your credit.

If you need to declare bankruptcy, you are going to be dealing with a lot of big changes that require you have accurate information.

What Is Bankruptcy?

Bankruptcy is a legal status that requires you to repay some (or none) of your debts. There are two main types: Chapter 13 and Chapter 7. Each of these types has different consequences for your debts, so it is important to understand the differences before you file.

• Chapter 13 bankruptcy is a repayment plan that lasts for three to five years. During this time, you pay back some of your debt to the court. This type of bankruptcy is often the best option for those who have a steady source of income. You will make your payments to a trustee who works for the bankruptcy court. While you pay back your debt, creditors cannot take action against you, such as wage garnishment or foreclosure.
• Chapter 7 bankruptcy is a liquidation of your assets that you use to pay back some or all of your debt. You must meet certain income limits when filing Chapter 7 bankruptcy. If you qualify, you can keep your assets such as homes and cars while getting rid of all unsecured debt.

What Does Declaring Bankruptcy Do to Your Debt?

Most of your debt will go away. The most important thing that happens when you declare bankruptcy is that your unsecured debt (credit cards, medical bills, payday loans) goes away. Unfortunately, you still have to pay back any secured debt (car loan, house mortgage) that you owe, but there are still options to ease this burden.

Generally speaking, the most important thing to know about declaring bankruptcy is that it will get you out of most (if not all) of your debt. Declaring bankruptcy also gives you a chance to start building credit again after the bankruptcy is discharged.

What Different Types of Debt Is Dischargeable?

• Credit card debt: Most credit card debt is dischargeable in bankruptcy. As long as you meet the filing income requirement, your personal promise to pay this money back goes away when you file Chapter 7 or 13 because it is unsecured debt. This includes late fees and any balances that are overdue.
• Medical bills: Most forms of medical debt are dischargeable, but there is some grey area on this one. While you will almost certainly be able to get rid of the medical bills that have been sent to collections, you might not be able to automatically get rid of your responsibility for ongoing treatment.
• Utility bills: Utility bills are generally dischargeable. This includes gas, electric, water, and phone bills.
• Personal loans: Anything that you owe on a personal loan can be discharged in bankruptcy, including late fees and interest.

What Happens to Property You Owe Money On?

Property that you own is subject to liquidation, which means that you must either pay back the money (on a house or car loan) or sell it and use the proceeds to repay your creditors.

• Your home: The good news is that you can keep your house if it is the mortgage debt and meet the filing income requirement. It doesn’t matter who the mortgage is in your name with, be it a spouse or other family member. The house cannot have any second mortgages unless you are able to discharge both. If you have a first mortgage only, the house is exempt from liquidation in bankruptcy.
• Car: You can keep your car (up to a certain value) and avoid liquidation as long as you have one secured loan on it. If the car is worth more than what you owe, or if it is a second car and not necessary for your job (such as a recreational vehicle), the car can be sold to pay off the loan.
• Other property: Any other property that you own, such as a boat or motorcycle, can be sold by your trustee to pay back some of your debt.

When you declare bankruptcy, there is a period of time that the court has to review all your paperwork and make sure everything is accurate. This process usually takes about four months, although it can vary if you have a complicated financial situation.

What Happens to Your Credit Rating?

Initially, declaring bankruptcy is bad for your credit rating. It will stay on your report for several years, although the impact it has after the first two to three years will start to lessen. Your credit rating can be a little misleading after declaring bankruptcy, however. The negative information on your report is not always a true reflection of your ability to repay debt. The bankruptcy stays on your record, but it doesn’t necessarily mean you are a bad credit risk.

How Long Does It Take to Rebuild Credit?

After bankruptcy, it takes about three years (or longer) to start rebuilding your credit. This is sometimes a hard pill to swallow, as it can take years before you are able to qualify for a loan or a new credit card. However, you can start the process of rebuilding your credit history soon after filing bankruptcy by using a secured credit card and paying it off in full each month.

Connect With the Best Experts in Bankruptcy Management Today

The best way you can get help with your bankruptcy is to connect with an attorney who specializes in bankruptcy. At Steele Law Firm, all we do is bankruptcy, which allows us to completely focus on this field and provide the top-notch legal services you need to start on your new path to financial freedom. Contact us today to get started.