What Is Bankruptcy & When To Declare It? [2023]

Bankruptcy is the toughest choice a person can ever make, but it is not easy to come to the point where you think of declaring bankruptcy.

It generally can happen if you have enormous debts that you can’t pay off, are behind on your mortgage payments and on the verge of foreclosure, or are being hounded by bill collectors—or all of the above. It may be, or it could not.

According to abi.org, in 2023, there was a 19% increase in Bankruptcy filings including all chapters from January 2022 totaling 31,087 from 26,215.

So what is the reason behind the increase in bankruptcy? Which path should you choose and when should you declare Bankruptcy? Find out in this guide!

What is Bankruptcy & When To Declare It?

Read: 10 Best Debt Relief Companies Of 2023

Key Takeaways

Bankruptcy Filing entails several legally mandated procedures, and failure to compile any of these procedures may result in your lawsuit getting dismissed.
You have to take and complete a debtor education course after filing for bankruptcy.
You may face criminal charges if the court finds out you sought to hide assets or committed other deception.
Bankruptcy plummets your credit score, and you will have to wait for 8 years before it gets removed from your history.

What Is Chapter 7 Bankruptcy?

Chapter 7 Bankruptcy is also called “Straight bankruptcy.” In this type of bankruptcy, a federal court trustee is assigned to supervise the sale of non-exempted assets such as cars, houses, household furnishings, etc.

The money that comes after selling these assets is used to pay your creditors, and the remaining amount of debt is forgiven.

Depending on where you live, there are certain items, such as clothing, basic furniture items, etc. that you may be allowed to keep.

Apart from this, the repercussions of Chapter 7 Bankruptcy are dire. You end up losing your property, and the bankruptcy information remains on your credit report for ten years.

And if you get into debt again, you will not be allowed to file for Chapter 7 Bankruptcy for eight years.

Also, if you have a very high income, then you will not be allowed to file for Chapter 7 Bankruptcy and would have to go with Chapter 13 Bankruptcy rather.

Chapter 7 Bankruptcy Filing Process

What Is Chapter 13 Bankruptcy?

Chapter 13, Bankruptcy, is a better option when compared to Chapter 7. In this type of Bankruptcy, you are allowed to keep your assets in exchange for full or partial repayment of your debt.

For this, your attorney and the bankruptcy court come up with a repayment term that could be of 3-5 years.

Depending on the negotiation, you would either pay full or partial debt during the repayment term. Once you do this, your debt will be discharged.

Chapter 13 Bankruptcy offers a lot of flexibility. In this, you get to retain some of your assets, and the information remains on your credit report only for seven years.

Another good thing is if you ever find yourself in debt again, then you will be able to file for Chapter 13 Bankruptcy in two years. ¹

Other Types of Bankcruptcies

There are a few more types of bankruptcies other than in Chapter 7 & 13. Let’s have a look at them:

Chapter 9: This type of Bankruptcy provides protection to financially distressed townships, schools, cities, etc., and provides a plan to resolve debt between a municipality and creditors.
Chapter 11: This type of Bankruptcy is meant for businesses, partnerships, or businesses owned by LLCs that owe $2.5 million or more in debt.
Chapter 12: This one is designed for financially distressed family fishermen or farmers. In this, the distressed person comes with a repayment plan to pay their creditors over 3-5 years.
Chapter 15: This Bankruptcy offers cooperation between foreign courts and U.S. courts to protect the interest of the U.S. if the case of foreign bankruptcy filings.

Bankruptcy Filing Process

If you come to the point where you want to file for bankruptcy, you need to be aware of the procedures and do everything well to avoid any problems.

Filing for bankruptcy entails several legally mandated procedures, and failure to compile any of these procedures may result in your lawsuit getting dismissed.

Individuals must attend a credit counseling session and get a certificate to include with their bankruptcy petition before filing for bankruptcy.

Your counselor should assess your specific circumstances, provide budgeting and debt management advice, and explain bankruptcy options.

Call the federal bankruptcy court nearest you or go to its website to get the names of government-approved credit counseling services in your region.

Following your filing, the bankruptcy trustee assigned to your case will schedule a creditors’ meeting, generally known as a 341 meeting, after the bankruptcy code’s part.

A bankruptcy court will decide your case based on your facts.

You may lose your case and face criminal charges if the court finds that you sought to hide assets or committed other deception.

After filing for bankruptcy, you have to take and complete a debtor education course after filing for bankruptcy, but before your debts get dismissed, to learn about budgeting and money management.

You’ll need to get a certificate to prove your participation once more.

In the case of Chapter 7, your debts will get dismissed if the court rules in your favor. A repayment plan will be in action according to Chapter 13. ²

Read: Cheapest Way To Get Out Of Debt

Read: Difference Between Debt Settlement And Debt Consolidation

What Happens After Bankruptcy?

Individual bankruptcy has various negative repercussions in both cases.

A Chapter 7 bankruptcy will be on your credit report for ten years, whereas a Chapter 13 bankruptcy will appear on your credit report for seven years.

According to one of the major national credit agencies Experian, your credit score will plummet, making you look to be a bad risk to firms who seek your reports, such as other lenders, insurance companies, and possible employers.

It’s also worth noting that the number of times you may have your obligations erased through bankruptcy is limited.

If you’ve had debts wiped in a Chapter 7 bankruptcy, you’ll have to wait eight years before you can do it again. ³

Pros & Cons of Bankruptcy

Pros

Respite from continuous calls from your creditors.
Offers you a clean slate.
Depending on the type of bankruptcy, you get to keep your house or other assets.

Cons

Difficulty in getting new lines of credit.
Costs $1,000-$2,000 to file for bankruptcy.
Remains on your credit report for 7-10 years.
Ruins your credit score.
Need at least $15000 in debt for bankruptcy to be fruitful.

⁴

What You Need and When to File a Bankruptcy?

Generally speaking, you would either need a lawyer or nothing. Corporations or anyone besides individuals need lawyers to represent them.

However, unlike businesses and partnerships, individuals can petition for bankruptcy without the help of an attorney.

It’s known as “pro se” case filing. 6 However, because bankruptcy is complicated and you must do it correctly to be successful, it is often foolish to undertake it without the assistance of a bankruptcy attorney.

When to declare bankcruptcy?

Types Of Debts That Bankruptcy Can’t Eliminate

Here are the types of debt that Bankruptcy cannot eliminate:

Court-ordered alimony
Student loan
Court-ordered child support
Reaffirmed debt
Government fines or penalties
A federal tax lien for taxes owed to the U.S. government
Court fines and penalties.

What are the Alternatives

Bankruptcy is not always the best option. There are frequently alternatives to bankruptcy that might help you lower your financial commitments without the negative effects.

Negotiating with your creditors outside of the courts can sometimes be beneficial to both sides. A creditor may agree to a repayment schedule that decreases your debt or spreads your payments over a longer period of time rather than risk getting nothing.
Forbearance, which allows you to cease paying payments for a set amount of time, or a repayment plan that spreads out smaller monthly payments over a longer length of time are two options.
Another alternative is a loan modification, which alters the terms of your loan permanently (for example, by decreasing the interest rate), making it simpler to repay. Be wary of unsolicited proposals from firms claiming to be able to save your property from going into foreclosure. They might be nothing but can artists. ⁵

The Verdict

Bankruptcy is a choice that many people avoid making because it is one of the worst things that could happen to your financial profile as it lowers your credit score, increases your premium prices for insurance, and makes companies wonder whether you will be able to make any payment when you are taking a loan, and your mortgages get riskier with high-interest rates.

That is why you should always try to avoid filing for bankruptcy and make sure that you are not even close to being bankrupt.

Even though there are other ways than filing for bankruptcy, sometimes these ways are not enough.

Some of those ways could be agreeing with the other side or other sides to create a new payment schedule or going another route.

When your only option is bankruptcy, you have to be extremely careful and do your due diligence well not to make any mistakes, as it often creates major problems when you do something wrong.

If you wrongfully filed for bankruptcy and you ignored details, this could get your case dismissed, which would block you from opening another case and put you in a horrible situation.

Filing for bankruptcy is not easy, and you have to do it extremely carefully to avoid any painful problems in the future for you and your financial profile.

You can always change your financial profile for the better after filing for bankruptcy, but you have to be extremely careful with every decision you make financially and stay on the radar of where your money is going.

FAQ

What are the repercurssions of Bankruptcy on a mortgage loan?

Bankruptcy makes it really hard for you to get a mortgage loan in the future.

Your application might get rejected, you might be charged a higher interest rate, or you might be asked to make a good amount of a down payment.

During the bankruptcy proceeding, try reaffirming your current mortgage instead of trying to get a new mortgage after declaring bankruptcy and losing your home. ⁶

What are the repercussions of Bankruptcy on a Credit Card loan?

Bankruptcy damages your credit report and stays on for a long time. All this makes companies less inclined to approve credit card loans to you.

They might straight away decline the offer, charge a very high-interest rate, or extent very unfavorable terms in front of you.

When should you declare bankruptcy?

Bankruptcy should always be the last resort, and declaring it or not depends on your capability to repay your debts.

Some common reasons that lead people to go for bankruptcy are:

Divorce
Poor financial decisions
Huge medical bills
Persistent unemployment
Unexpected emergencies such as death, natural disasters, etc. ²

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Amit Gupta

Amit Gupta is the founder of National Planning Cycles, a company that helps startups, individuals, and small businesses with their financial planning. He has a vast amount of experience in the finance sector, having managed Google Play accounts for some of the world’s most successful unicorns. Amit is an expert in his field, and he uses his knowledge to help others achieve their individual goals.

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