Filing for bankruptcy can be an effective way to clear debts and rebuild your finances in a timely manner. The timeline of your case depends on whether you file for Chapter 7, Chapter 11 or Chapter 13 protection. The type of case you file will also determine how much you might have to repay as well as the actual process of filing.
What Is Bankruptcy?
Bankruptcy allows you to eliminate or reduce most unsecured debts as well as a variety of secured debts such as a mortgage or auto loan. In a Chapter 7 case, assets are liquidated in an effort to pay your creditors. If your debts exceed your assets, any remaining eligible balance will be discharged. In a Chapter 13 case, you make payments over a period of three or five years. At the end of the repayment period, remaining eligible balances are discharged.
Tips and Tricks When Filing for Bankruptcy
Ideally, you’ll file when your income is at its lowest point. This is because eligibility for Chapter 7 status depends on whether your income over the past six months is at or below the median household income in your state.
In addition, you’ll want to work with an attorney to create a list of allowable expenses to reduce your disposable income. These may include rent, utility or other payments that you make on a regular basis. This is because you might be required to file for Chapter 13 protection even if you pass the means test if your disposable income is too high.
It’s important to note that you don’t count monthly payments toward debts that will be discharged as expenses when filing bankruptcy documents. The law requires this because the goal of a bankruptcy case is to determine how much you have to pay creditors if those obligations didn’t exist.
What to Avoid When Filing for Bankruptcy
It’s generally in your best interest to file with an attorney as opposed to on your own. Legal counsel may flag any transactions that might be seen as preferential or fraudulent such as selling your car to a friend for $1 or making large credit card purchases just prior to filing.
You will also want to make sure that you take your debtor education classes in a timely manner. Otherwise, your case can be dismissed, and you’ll have to pay a fee to refile the matter. Finally, make sure that you comply with all requests for documents from the trustee in your case.
Failing to comply with any lawful request could result in your case being dismissed with no opportunity to reopen it. In other words, you would still owe the debts associated with your case while your creditors would be free to file lawsuits or engage in other collection efforts against you.
While bankruptcy can have a positive impact on your finances, it’s important to take care when filing. Having an attorney by your side may help you avoid careless or other seemingly minor mistakes that might get your case dismissed or even lead to criminal charges.