Understanding How Bankruptcies Work

How Bankruptcies Work

Do you feel as if your debt keeps mounting no matter what you do? Are debt collectors calling, demanding payments for your outstanding bills? If your finances keep taking a downward slide and you cannot see any way out, you may want to contact a bankruptcy attorney to discuss your options.

Although it is not for every person or situation, bankruptcy can be a legal way to get out of debt under the right circumstances. In fact, figures supplied by the United States government indicate that around three-quarters of a million bankruptcies are filed annually.

What Happens When You File for Bankruptcy

Bankruptcy proceedings allow you to finally catch your breath and get out from under debt that would otherwise keep piling up and drag down your credit ratings and reputation. When you file for bankruptcy, the majority of your debts will be reduced or eliminated. For instance, if you owe quite a bit on your credit cards, which is a type of unsecured debt, you may not have to pay it all back.

The downside to declaring bankruptcy is that your credit report will be affected for up to 10 years. However, bankruptcy can still be a prudent decision if you know there is absolutely no way you can keep up with the money you owe creditors.

Types of Bankruptcy

The bankruptcy code involves a few types of bankruptcy choices. The two pertinent to individuals and families are Chapter 13 and Chapter 7. When you first sit down with a bankruptcy lawyer to talk about potentially filing for bankruptcy, you will work together to determine which type of bankruptcy is best suited for your situation. Be aware that specific types of debt, such as student loans and mortgages, may not be completely wiped from your responsibility in Chapter 13 or Chapter 7. Still, your debt load will likely be reduced to a point where the remaining debt is easier to repay.

No matter which type of bankruptcy you decide is right for your needs, you can be expected to undergo a certain amount of credit counseling. Otherwise, the bankruptcy courts will not honor your request for this type of legal solution to your debt problem. Credit counseling can help you learn how to better manage your income and expenses for the future.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is one way of reorganizing and consolidating your debts without losing assets such your house or car. Under Chapter 13, you would create a repayment plan to get your debts in order and pay them off systematically.

In order to qualify for Chapter 13, you must have unsecured debt of less than $394,725 and secured debt of less than $1,184,200. Unsecured debt is debt that is not backed by the value of an asset. Secured debts, such as real estate properties, use the asset as collateral. Thus, secured debts can be seized in the case of default. Plus, you must complete your repayment plan within a pre-arranged number of years, usually no more than five.

Generally, Chapter 13 is best suited for those who have a steady income. In other words, they know how much money is likely to come into their household per month. This gives them a starting point for constructing a plan to pay the debt at a steady pace without incurring additional interest, in most cases. After the repayment plan is laid out, the bankruptcy courts will appoint a bankruptcy trustee to review it, negotiate the plan with all creditors, and either approve the plan or make recommendations for changes.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also a way to obtain debt relief, but it involves liquidation, not reorganization. Under Chapter 7, nearly all secured debts are sold. Therefore, individuals who file Chapter 7 typically have to leave homes they cannot afford and find another place to live. However, this may be the best decision, especially if there is no reasonable way to cover mortgage payments or payments that are already in default.

With Chapter 7, filers get a “fresh start” option. With the majority of their debt relieved, they can begin to build wealth. Even though most people who declare Chapter 7 have to walk away from their residences, cars, and other assets, they do get the chance to free themselves from the heavy weight and stress of debt.

All individuals thinking about filing for Chapter 7 bankruptcy will have to complete a Chapter 7 means test. This test examines income and expenses and is necessary to determine if someone is eligible for Chapter 7 bankruptcy. If the test shows that Chapter 7 is not a viable choice, Chapter 13 bankruptcy may be a wiser solution.

Filing for Bankruptcy

You cannot simply declare bankruptcy, file a few papers, and have your debts discharged. The process will take several months, during which time you will have to make many practical decisions. You can also expect to go through all of your expenses, income, and debts with different people, such as your bankruptcy attorney and credit counselors. Though the process can seem overwhelming at first, treat it as an opportunity to learn how to manage your money well for the future.

Remember that declaring bankruptcy as a means to debt management or discharge will affect your credit score for a long time. Choose an attorney who can help you determine how to find appropriate housing and make smart pre-filing decisions to ensure that despite the credit hit you will take, you will be ready for the reality of living without the ability to get loans, credit cards, or other secured or unsecured debts for many years.

Tips for Money Management After Declaring Bankruptcy

Regardless of whether you and your bankruptcy attorney choose Chapter 7 or Chapter 13, take the time to prepare to be a wise money manager in the coming years. Some ways to avoid bankruptcy later in life include:

  • Constructing a weekly or monthly household budget and sticking to it.
  • Avoiding sudden purchases, especially ones that are very expensive.
  • Limiting non-essential expenses like travel, entertainment, and eating out.
  • Finding ways to save a “nest egg” to support you in times of financial instability.
  • Looking for lower-cost living options like buying discounted merchandise and services.
  • Paying off credit cards every month rather than keeping a balance.
  • Buying assets that are affordable.

Over time, you will learn how to better balance the money that is coming in and going out of your bank account. If you begin reverting to old habits, seek out advice from a credit counselor or someone who can help you overcome bad financial habits.

Choosing a Bankruptcy Attorney

Filing for bankruptcy is a very personal experience and one that can feel humbling or even embarrassing. For this reason, choose the right bankruptcy lawyer in Georgia who will give you counsel without judgment. Your objective should be to find an attorney who has extensive knowledge of federal and state laws, and who can provide you with the best representation through your Chapter 7 or Chapter 13 bankruptcy filing process.

At the Law Office of Jeffrey B. Kelly, each team member works diligently with bankruptcy clients to help them work towards the most suitable debt relief choice based on their information and circumstance. Contact us today by calling (770) 637-1761 and start the process with a free consultation. All initial meetings are held in strict confidence.

You deserve a life that is not marred by constant worry about creditors, repossessions, foreclosures, defaults, bounced checks, and debt collection agencies. Allow our team of legal bankruptcy professionals to become your trusted partner as you forge ahead without the burden of mounting debts.

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