If you feel that you are overburdened by loans and debts and may not be able to repay them anytime soon, there is a possible way to get out of this financial mess. One is debt settlement, debt concession with the creditors, or by filing for bankruptcy.
What is Bankruptcy?
Bankruptcy is a legal term that is used for a business or person that is not financially stable enough to repay their debts. The process of bankruptcy beings with an appeal filed by the person unable to pay the debt. Someone you owe a debt to can also file to declare you bankrupt, even if you don’t allow them to. Bankruptcy is intended to give monetary help to people, enterprises, organizations and certain trusts to overcome debt troubles by stopping the legal actions of creditors (otherwise called a stay of procedures).
Bankruptcy helps you get rid of your debts and offers a fresh start to individuals and businesses. The unpayable debts are forgiven, whereas creditors are repaid to some extent by selling some assets of the debtor.
It is a genuine issue that can have critical, long-lasting results. While it might be an alternative, it is anything but a simple way out.
Types of Bankruptcy
There are 3 types of bankruptcies that you can file for depending on your financial and business conditions:
- Chapter 7 (Liquidation bankruptcy)
- Chapter 11 (Reorganization or rehabilitation bankruptcy)
- Chapter 13 (Reorganization or rehabilitation bankruptcy)
Chapter 7 is for organizations that see no practical money-related future in their business and are too far behind paying off debtors. At the point when an indebted person files for chapter 7, a trustee is named to take responsibility of the business. The main goal of the trustee under chapter 7 bankruptcy is to promptly sell the nonexempt assets of the indebted person (also known as the liquidation of assets) so that the money collected can be used to pay off the debt.
Once the trustee sells all the assets, creditors can file a claim to the court regarding their payments. The money is then divided among the creditors and the trustee is also paid. After this, the debtor is discharged from the debts, which means they are then free from the debt.
Chapter 11 is a suitable choice for businesses that might have a future and require some time to stabilize before the debts can be paid off. You are eligible to file for chapter 11 bankruptcy if you have under $336,900 unsecured debt and $1,010,000 secured debt.
Under this plan, the company or business continues with their work, while a plan is drawn to repay debts while maintaining the assets. This plan may incorporate scaling back the business tasks to diminish costs. Liquidations of assets to pay the debtors is also possible in some cases.
The business is restricted from making specific choices without the authorization of the courts. These include the offering of benefits other than stock, beginning or ending a rental contract, and ceasing or extending business tasks. The court likewise has control over choices of withholding and paying lawyers and entering contracts with sellers and associations. This is the most complex and most expensive type of bankruptcy.
Chapter 13 bankruptcy is similar to chapter 11 bankruptcy and is only allowed to be chosen by individuals with a regular income. Under this plan, the consumer is allowed to construct a fair repayment plan that proposes to repay all or a considerable segment of their debts in a timespan of three to five years.
The assets of the debtor are not liquidated under chapter 13. The plan has to be in favor of the creditor or else the creditors or bankruptcy trustee have the authority to object to your plan. However, if the court finds your plan fair, it may be approved.
Your installments for repaying the debt will start the month after you file for chapter 13 bankruptcy. Chapter 13 is to be viewed as a reimbursement plan in which debts are rearranged and organized by a bankruptcy court trustee according to your monthly wage. After you complete all planned payments, unsecured debts that cannot be repaid are discharged.
Pros and Cons of Filing for Bankruptcy
Although filing for bankruptcy can help you cope with your financial burden, there are still some aspects that have to be considered seriously before you file for bankruptcy. It is always better to weigh the pros and cons before you move ahead.
Pros of Filing for Bankruptcy
- You are discharged of many of your debts.
- Creditors are not permitted to have any immediate contact with you and must contact the trustee.
- You get an automatic stay.
- You do not lose all your possessions. Some personal items such as clothes, house, and jewelry are exempted.
- It is possible to improve your credit score once you are discharged from bankruptcy.
Cons of Filing for Bankruptcy
- It stays on your credit history for up to 10 years.
- It takes years before you can file for bankruptcy again.
- Not all debts are discharged such as taxes and student loans.
- Your property and other assets may be sold.
- It can be very difficult to obtain a mortgage for 2-3 years after the declaration of bankruptcy.
What to do Pre- and Post- Bankruptcy?
Although many individuals and businesses consider being bankrupt a considerable blow to their image and the reputation of their company, there are still some steps that you can take before and after filing for bankruptcy that can help you recover from this experience stronger and more determined for a better future. Below are some tips that can help guide you on what to do and what not to do before and after filing for bankruptcy.
- Since filing for bankruptcy can have long-lasting effects, try searching for alternatives. If you think your monetary crisis is temporary or the debt can be paid off if you find a second or third job, it might not be the right time to file for bankruptcy.
- One wise step to take pre-bankruptcy is to diminish your non-exempt assets or get them changed legitimately into protectable, absolved assets.
- Never declare another heir’s name or transfer your real estate or any of your assets to a family member or friend prior to filing for bankruptcy. This isn’t just lacking honesty, but these assets are also probably going to be exchanged back by the trustee.
- On your bankruptcy documents, you are supposed to provide accurate information about your debt, assets, wage, costs and financial history. In case you intentionally distort your data, for example, by ignoring to declare an asset, you could be liable for criminal punishment. Also, your case may be dismissed by the court if your assets are not filed correctly. Furthermore, if you don’t file the names of all the debtors, the debt you owe to the missing debtors will not be discharged.
- You should rethink documenting bankruptcy if you are going to inherit property (within a year), gain a settlement from a claim, or be repaid for a loan you gave to someone else. Once you get the assets, you won’t be bankrupt, mainly if you utilize this cash to settle you’re your debtors and get out of debt yourself.
- If you owe money to your friends and family, do not repay them before filing for bankruptcy. This is because the courts want to deal with all of your creditors at once, including your family and friends. All the debtors are supposed to be treated equally, so making any preferential payment is not allowed by bankruptcy laws.
- One of the mistakes that debtors are likely to make before they file for bankruptcy is shopping on their credit card or going on a vacation. According to the bankruptcy code, if you owe more than $500 in credit card debt to a creditor for purchasing unnecessary items 90 days before filing for bankruptcy, that particular debt will be deemed non-dischargeable. It is better that you stop using your credit cards prior to filing for bankruptcy.
- It is better to hire an attorney since the laws of bankruptcy have become quite complicated, so experts advise not to file by yourself. Attorneys give the appropriate advice on whether you should file for bankruptcy and whether you have any other better alternatives. In the latter case, they will also let you know about how much it will cost and benefit you. Weigh your options and possible outcomes of the case before you file for bankruptcy.
- Educate yourself about the consequences of filing for bankruptcy. Many debtors are not prepared for the drastic effects bankruptcy has on their credit score, which may last up to 7 to 10 years.
- Once you file for bankruptcy, you are under no obligation to pay the debtors outside the court. Therefore, if you have an automatic installment account set up, those installments may not stop by themselves. By ceasing your auto payment accounts before filing for bankruptcy, you can spare yourself several dollars and the struggle to get back the money the creditors have taken illegally out of court through auto payments after your bankruptcy has been filed.
- Create a financial plan and stick to it. One key point in making progress toward recovery is understanding diverse planning methods. You will need to have a firm handle on how to collect and spend in the future. Thus, you need to develop plans on how you can run your business smoothly in the future.
- Make sure you are checking your credit report often. Ensure that the data relating to your bankruptcy is precise and there are no errors on your report. It’s better not to discover when it is too late that there is incorrect information being reported.
- If you need to borrow money again, keep in mind that the amount you are borrowing is not more than your monthly income so that you do not incur any more debt.
- In case a creditor tries to get in touch with you, let them know about the discharge of debt through bankruptcy and provide them with your case number. If the creditor still keeps on reaching you, let your lawyer know.
- Make sure you are paying your bills on time. If you are paying your utility bills late, there is a chance that the utility company will inform the credit bureau, which will obviously have a negative impact on your credit rating.
- Start saving! Save some cash out of every paycheck that you can store for emergencies. Spend on what you need rather than what you want and stop spending on unnecessary luxuries. These monthly savings can add up and result in a nice nest egg for you in the future.
- Don’t let yourself get into the hands of scammers. Companies, especially those that offer credit repair services, are up to no good. No one but you can repair your credit and pay somebody does nothing to accelerate the procedure.
- Don’t be afraid to seek help and advice from professionals and different entrepreneurs in your industry.
- Try investing in Tax-Free Savings Accounts and RRSPs to prove to banks that you are still capable of handling your finances.
- Lastly, don’t be hard on yourself. Accept that many huge and successful organizations have faced bankruptcies in the past. Learn from your past experience and do not be ashamed to talk about it and advise others on it.
If you take the right steps before and after you file for bankruptcy, there is a huge chance you will be able to repair your losses and minimize the chances of getting bankrupt again in the future. Once you get a fresh start, it is easier to handle your matters if you have learned from your past mistakes. Although it may take some time, you will eventually fully recover from your bankruptcy if the right steps are followed.