Life doesn’t always go as planned. You may have needed get into debt that has exceeded your ability to repay it each month. You are now wondering how to put your financial situation in order.
Knowing when to declare bankruptcy is a valuable skill for individuals and small business owners. Learn more about it and determine if this is the best decision for your financial needs.
What is Bankruptcy?
Bankruptcy is a legal procedure started by people who have too much debt. They must sign a federal petition that considers their outstanding financial obligations or debts before asking their creditors to work with them to resolve their debt with the remaining assets.
What are the types of bankruptcy?
People can accumulate too much debt as individual consumers or business owners, so there are many types of bankruptcy to deal with these situations. These are the specific chapters outlined in the US Bankruptcy Code that you can consider if you find yourself unable to repay your debts.
Chapter 7: Individual Liquidation
Most people who must declare bankruptcy for personal debt will file for Chapter 7. A federal court appoints a trustee to help the individual sell assets to pay off lenders or creditors. You can claim exemption for a specific good Chapter 7 bankruptcy, such as your car, pension, or household equity.
Chapter 11: Reorganization Bankruptcy
Small business owners can file for Chapter 11 bankruptcy to reorganize their assets, affairs, and debts. If the collection of these factors exceeds $5 million, an examiner will intervene to guide you through the process.
This can be a useful step for business owners, as it allows the business to remain open and operational during restructuring. Creditors can also propose a Chapter 11 bankruptcy if the debtor does not propose the idea first.
Chapter 13: Asset Maintenance and Repayment Plan
People who apply Chapter 13 Bankruptcy can keep their assets but must pay off their debts within three to five years of their plan being approved by a court. You won’t have to liquidate anything if you don’t miss or skip any payments. Most people who do not receive this bankruptcy approval are workers without reliable sources of income.
When to declare bankruptcy as an individual
Before declaring bankruptcy, it is essential to negotiate with your debtors or creditors. They will still be able to get their money back if there is a way for you to make long-term payments and possibly pay off your debt more efficiently.
Sometimes debtors will negotiate for this reason. However, they may not if they don’t see a viable path due to your background or financial situation.
When negotiation is not possible and you are on the verge of losing your home or other essential assets because you cannot make monthly payments, it may be time to file for bankruptcy. First, schedule a credit counseling session to obtain the correct certificate for the type of bankruptcy you have requested.
An advisor will review your assets and liabilities during this session and find the best solution for your needs, even if it is not bankruptcy. You can find these experts by contacting federal credit counseling agencies.
You may be worried that your existing property or equity will not be enough to pay off your debts. If so, your most senior lending institution will establish a financial solvency plan to address the remaining debt owed alongside your credit counselor. By developing the necessary changes, your minority lenders will follow the most important decisions if they create the plan in good faith.
When to declare bankruptcy as a business
When debtors fail to negotiate with small business owners regarding their loans, it may be time to file for bankruptcy. Typically, this would mean a Chapter 11 case, which has a few pros and cons for people running small businesses.
You can benefit from it type of bankruptcy if your creditors or debtors do not meet to discuss the new contractual conditions. Instead, the federal case would bring everyone to the same table to discuss options like extended payment terms for real estate, equipment or manufacturing loans.
Small business owners also don’t have to immediately liquidate their businesses or assets to pay off debt. Instead, they can stay open and operational because Chapter 11 prioritizes federal court-approved repayment plans. A fiduciary becomes the facilitator who monitors ongoing payments once both parties have reached agreed terms.
Small business owners are hesitant to file for bankruptcy because it can become a time-consuming and costly process. Depending on the court schedule and how easily debtors accept payment plans, you could pay an average of $19,738 just for filing and attorney fees.
Additionally, you will be required to make upfront payments within the first few months of your plan agreement. This can be difficult after paying legal fees while continuing your day-to-day business operations.
How to declare bankruptcy
There are many steps involved in filing for bankruptcy. First, familiarize yourself with the process before making a final decision.
1. Review your options
Remember that bankruptcy may not be necessary in your situation. Paying off debts like student loans and unpaid taxes will give you relief while you examine consolidation or liquidation. You will need your financial history and credit report documents to make the best decision.
2. Choose the type of bankruptcy
If you decide that bankruptcy is right for you or your business, you will need to choose from Chapters 7, 11, or 13. Personal or business bankruptcy is the first way to narrow down your options. Thereafter, you can decide based on the value of your assets, outstanding debt, and ongoing income.
3. Decide to find a lawyer
The American Bar Association and state associations have rosters of attorneys willing to help people file for bankruptcy. Legal aid clinics and free services can also help you if you cannot afford legal assistance but want representation.
The option to represent oneself is also called pro se. You won’t have to pay attorney fees, so you’ll save most of your filing costs. However, you may not receive the debt relief you need. A recent study found less than half of cases pro se led to debt relief, while 93.9% of the bodies represented did so.
4. Pass a credit counseling course
Anyone filing for bankruptcy of any type will need to take a credit counseling course. It helps people weigh their options to determine the best course of action, whether it’s bankruptcy or other types of debt relief. If you complete your course more than 180 days before deposit, you will need to retake it closer to your official deposit date.
5. Complete your advice and legal forms
After meeting with credit counselors and completing your course, you will need to complete all related forms. Many people are involved in bankruptcy, so be prepared for this step to take time. The forms include your financial history, statements, fees, and other related information. Your lawyer can help you if you choose to be represented.
6. Pay fees and complete forms
Your documents also come with a lot of fees. There are fees for filing, administrative work, and even surcharges if a trustee oversees payment plan agreements with your debtors. Sometimes people can get these fees waived, but only if their income is 150% below the poverty line determined by a federal court.
7. Negotiate with your creditors
Whether or not you appear in court, your creditors will sit with you after you pay your fees and complete all necessary paperwork. They will review your situation and determine the best way to pay off your debts. Any agreement reached at this stage will be legally binding, as the meeting is held under oath.
8. Attend debtor education classes
You must take post-filing training courses if your lenders pay off your debts. This ensures that you have learned to better manage your finances based on your academic performance in courses and tests. You will need to pay class fees and obtain the final certificate to complete your bankruptcy.
What is life like after filing
What will your life be like after you finish your bankruptcy? It depends on how you deposit and your situation.
Chapter 7 bankruptcies remain on credit records for a decade after both parties resolve outstanding debt. On the other hand, a Chapter 13 bankruptcy will only last for seven years.
You will also lower your credit score no matter how you decide to file your case. This could make it more difficult, if not impossible, to get money from insurance companies and investors if you need to expand your business or recover from an emergency.
If you face a large debt immediately after going bankrupt, you may have to bear it alone for many years. There are limits to how often people can file specific chapters of bankruptcy.
Debts that do not count for bankruptcy
You may not need to file for bankruptcy if you owe money for reasons that don’t qualify. Here are some types of debt that federal courts do not count in bankruptcy filings:
- Unpaid bills
- Personal loans
- Credit card debt
- Medical bills
- Payday loans
- Unpaid rent bills
Contacting legal representation or credit counselors will help you determine if your debt qualifies for bankruptcy or if you need alternative solutions.
Know when to declare bankruptcy
Knowing when to declare bankruptcy is essential for manage your finances. It could make things brighter or not be part of your future. Talk to an expert to see if this is the best way to manage your debts while preserving your personal or professional life.
First published on Due. Read here.
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