Most people become bankrupt because they want a life that is free from debt and creditor contact. Although you can eliminate debt in just four months, there are several potential implications of bankruptcy that you should be aware of before you file.
Bankruptcy Implications Since the Rules Were Changed
After the revision of the bankruptcy laws in 2005, not everyone will now qualify as the income needs to be below the state median. If you don’t qualify, you may be eligible under another test. If you’re in a position to pay back some or all of your debt, you won’t be able to file chapter 7 under the current laws. You’ll be expected to turn over non-exempt assets to a court-appointed trustee and pay some of your earnings to creditors under a chapter 13 bankruptcy agreement instead.
Financial Implications of Bankruptcy Before Filing Chapter 7
You may want to clear your debt, but it will cost you. Before filing chapter 7, you’ll need bankruptcy credit counseling and must take a debtor education course from a Department of Justice-approved provider 180 days before you file. Each course costs $50 to $100, although you may be able to get this fee waived in certain circumstances. You’re also likely to need professional legal help from a bankruptcy attorney which will set you back upwards of $2,000.
What Bankruptcy Debts Can be Legally Eliminated?
Most unsecured debts can be written off, but you may not be able to eliminate all the money you owe under section 523(a) of the bankruptcy code. Car finance, mortgages, secured credit cards and personal loans secured on your home cannot be cleared, but a deficiency following the repossession and sale of any collateral can be written-off. Student loans, alimony, child support, IRS taxes (not income tax), fraudulent acts, divorce settlements and acts of recklessness or malice that results in debt cannot be cleared.
What is the Effect of Bankruptcy on Secured Debts?
Although you can’t eliminate secured debt, there are further implications of bankruptcy. If you don’t want to surrender your house or car, you’ll need to reaffirm the debt by signing a separate agreement after the 341 meeting. You’ll then make your mortgage or car finance payments separately. All other debts that cannot be included in the agreement, including your student loans, back taxes, alimony and child support, will also need to be paid to the appropriate party under a separate arrangement.
Getting Credit After Bankruptcy Discharge
The effect of bankruptcy on your credit score is serious. The matter will be recorded by credit reference agencies and this will be visible to anyone who performs a credit search for the next 10 years. Despite the fact that you’ll be discharged after just 4 months, post-bankruptcy credit will be far more difficult to obtain. If you can get approval for credit, the rate of interest will be a lot higher. You may be able to refinance on more favorable terms a couple of years later.
Is Filing for Chapter 7 Bankruptcy the Best Option?
Although the implications of bankruptcy may not influence your decision to proceed, it’s still important to be aware of any potential pitfalls and costs before you go ahead. You may wish to consider a bankruptcy alternative, such as a debt management plan or debt settlement program, if you have some disposable income to offer your creditors.