5 Things to Know Before Filing for Bankruptcy

Filing for bankruptcy is not an easy life or financial decision. Whatever the circumstances that led up to this point, it may be even harder to reach the decision to officially file. Even though the number of cases has decreased over the past 20 years, it’s still a hard decision for many individuals.

While many people may be familiar with bankruptcy, the majority may not know what it entails or what the consequences are. We all probably know it’s much more than simply shouting it to everyone, a la Michael Scott from The Office.

But if you’re thinking about filing, here are some things you should know before making it official.

There Are Different Types of Bankruptcy

Unfortunately, there is no blanket bankruptcy you can use for any and all situations. But rest assured, there are only two that are quite common.

Chapter 7

With a process lasting about 3-4 months, Chapter 7 is also referred to as “liquidation” bankruptcy. With Chapter 7, you can discharge (clear) some of what you owe, like outstanding credit card payments or loans.

It’s the best option for those wanting a clean slate and fresh start. That’s not to say it’s pain-free, many Chapter 7 filers must sell many of their assets and your credit could be doomed.

Chapter 13

Also known as the repayment or reorganization form of bankruptcy, this form of filing will let you set up a repayment plan and you’ll have to pay back your debts over time. You won’t be required to sell anything, but the process can take much, much longer.

You’ll be making monthly payments for years in an effort to pay everything off.

Other Types

There are other forms of bankruptcy, but they sometimes only apply to certain people in certain professions or very specific circumstances. In this case, it’s best to hire a lawyer who can walk you through the steps and find the best option for you.

Not All Debts Can be Cleared

Unfortunately, bankruptcy doesn’t clear you from all your debts. Before the negative, let’s focus on what debts can be cleared. These include:

  • Medical bills
  • Credit card debt
  • Personal loans
  • Court fees
  • Housing fees

Those that cannot be cleared, are the following:

  • Child support
  • Any fines from law-breaking activity
  • Tax debts

Other times, you have to ask the court about discharging certain debts, as the process will not be automatic. You may also need to meet some legal requirements in order to qualify.

Your Accounts Are Going to be Public

Bankruptcy is not for the shy, as all of your financial records are going to be poured over by the court and creditors.

You’re going to be asked all sorts of questions about your financial activity and salary, something that can be quite embarrassing even for those not filing for bankruptcy. The worst part is that these questions come in a public room, meaning just about anyone can attend.

The reasons you’re in debt will be aired out for plenty of people to hear and it can become uncomfortable really fast.

Filing for Bankruptcy Costs Money

It’s a bit of a catch-22 here. You’re going through a proceeding because you can’t pay back your debts, but to do so, you have to pay.

You’ll have to pay a lawyer fees for handling your case and those can vary greatly depending on the lawyer. Some charge a flat fee while others charge a percentage of the total debt owed. You’re going to want to do your due diligence before you make a decision on which lawyer would work best for you.

Your Credit May Be Ruined

Thankfully, that’s not a forever statement but it’s definitely going to feel some pressure for the next few years. Many filers need an average of two years before they can start to recoup some of their losses and almost no one is going to hand you a loan.

In addition, creditors that do give you a loan are likely to slap on a hefty premium for their services. You’ll have to slowly work your way back up by paying off small amounts of credit over the years to be able to feel like you’re treading water again.