What to Know Before You File For Bankruptcy
by Becky Schmitz |
| Becky Schmitz is a certified tax resolution specialist and enrolled agent.
Named 2006 Top Practitioner by the American Society of Tax Problem Solvers, she
is the owner of
Centsable Accounting, a tax problem resolution company based in Montana, but
serving the entire U.S. As part of many tax problem resolution offered,
Centsable Accounting offers assistance with bankruptcy.
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You may feel you don't have any other options.
Maybe you owe several people money, your credit is maxed out, and you are
falling deeper into debt, so you start to explore filing for bankruptcy. You
thought you never would, but you've heard about it, maybe even someone you know
has done it and the question you want to know is when should you? All types of
bankruptcies exist: chapters for businesses, individuals, even a chapter for
farmers and fishermen.
First, understand that two main types of
bankruptcy exist for individuals:
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Chapter 7 is a straight or liquidation
bankruptcy, meaning the debtor's nonexempt property is sold to pay
creditors. Because of the means test, this type of bankruptcy is more
difficult to file. |
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Chapter 13 is a repayment plan for
individuals, usually allowing them 3 to 5 years to pay off their debt.
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Chapter 7 bankruptcy accounts for almost
two-thirds of all bankruptcy filings. For those wanting a fresh start faster,
Chapter 7 bankruptcy may be the bankruptcy to go with over Chapter 13. The case
is often over in less than 6 months and no minimum debt is required.
Additionally, with Chapter 7, debtors can sign a "Reaffirmation Agreement" where
they can keep certain assets like a car or house while continuing to pay a loan
or mortgage. A negative of Chapter 7 bankruptcy, however, is that co-signors of
a loan can be stuck with your debt unless they also file for bankruptcy.
File Chapter 7 bankruptcy if you:
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Have completed
mandatory credit counseling. |
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Are ready to
sell nonexempt property and distribute the proceeds to your creditors. |
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Have property
left over so that when you are finished selling the property to pay off
your debt, you will be able to start over again financially. |
Chapter 13 may be a more suitable choice if you
have valuable property you want to keep or have too much income to file a
Chapter 7 bankruptcy. With Chapter 13, debts can be reduced, and you have more
time to pay off the debts that can't be discharged from either type of
bankruptcy. This type of bankruptcy allows you to separate creditors where they
receive different percentages of payment so debts with a co-debtor can be
treated differently than debts on your own. Disadvantages to a Chapter 13
bankruptcy include having to use post bankruptcy income to pay off debts,
incurring higher legal fees because filing Chapter 13 is more complex, not being
able to file if you are a stock or commodity broker, and needing to be involved
in the bankruptcy court process for as long as it takes you to pay off your
debts (3 to 5 years).
File Chapter 13 bankruptcy if you:
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Have completed
mandatory credit counseling. |
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Have a regular
income but need time to pay off debts. |
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Meet the debt
limit. The limit varies but the most debt you can have for a Chapter 13
bankruptcy is typically around $1 million. Unsecured debts have to be
under an amount around $300,000 and secured debts should be under around
$700,000. |
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Are not filing
for a corporation or partnership. |
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Want
co-signors to be immune from collection efforts if the plan is a full
payment one. |
Now that you know the types of bankruptcy filings
that exist, and have an idea of what type of bankruptcy might be best for you,
don't stop there. Most likely, there are other questions that you need answered.
Below are a few of the most common:
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What effect
will bankruptcy have on my credit? Your credit history may already be
poor, but keep in mind that a bankruptcy will remain on your credit
report for
up to 10 years. Of course, credit can be re-established. |
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Will my
coworkers, neighbors, and friends know that I have filed for bankruptcy?
Though employers and landlords will not be sent notices or otherwise
directly informed about your bankruptcy, anyone can find out that you
filed because bankruptcy is a public record. If a potential employer
does a credit check, bankruptcy filings will show up on that report,
which can seem like bad credit is on your record even years after the
bankruptcy was filed. |
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Will
bankruptcy prevent me from having my wages garnished? Both Chapter 7 and
Chapter 13 grants protection against wage garnishment and creditor
collection. |
What does bankruptcy cover?
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Credit card
debts |
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Medical bills
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Unsecured
loans |
What types of debts are not erased with
bankruptcy?
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Student loans |
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Alimony and
support |
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Debts from
fraud |
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Drunk driving
compensation |
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Tax bills
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Contact the organizations affiliated with these
types of debts to work with them directly.
Under certain circumstances, income taxes may be
discharged in bankruptcy. Usually taxes must be at least 3 years old, assessed at
least 240 days prior to bankruptcy filing, and filed voluntarily at least 2
years ago. Consult a tax professional regarding details. With Chapter 13
bankruptcy, payment plans can often be worked out for taxes.
Other options exist to help with financial
difficulties. Contact a qualified tax professional to discuss your situation.
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