Know the differences between chapter 7 and chapter 13
Individuals typically file either chapter 7 or chapter 13, two very different types of bankruptcy. Chapter 7 is a “liquidation” bankruptcy where most of your property is sold and used to pay off your debts and other debts are discharged so you never have to repay them.
A chapter 13 bankruptcy protects secured assets such as your house from being sold when you file, stops collections and allows you to reorganize your debts and make payments for a period of three or five years. If you catch up on back payment during the repayment period, you will be able to keep your assets.
You must be eligible to file
Before you’re allowed to proceed with chapter 7 bankruptcy, you must first pass what’s known as a “means test”, an analysis of your finances conducted by an independent trustee after you file to determine whether you qualify for bankruptcy.
The means test includes an analysis of the last six months of your income and also your financial history for indicators of potential bankruptcy abuse such as maxing out all your credit cards the week before you file or taking out an excessive amount in payday loans or cash advances within 90 days of filing.
You must seek credit counseling before filing
Except under certain emergency circumstances, you aren’t eligible to file bankruptcy unless you’ve received credit counseling within 180 days before filing, according to UScourts.gov. You must also complete a debtor education course before your debts can be discharged.
However, you must obtain free or nominal-fee credit counseling or take a debt education course only credit counseling agencies and debt education providers that have been approved by the U.S. Trustee Program.
Consider hiring an attorney
You can file for bankruptcy “pro se” without an attorney, but you’re probably better off if you hire a bankruptcy attorney to file. For one thing, an attorney can explain the difference between filing for chapter 7 or chapter 13 bankruptcy and help you determine which option is best.
Hiring a bankruptcy attorney also helps ensure that you’re not unwittingly leaving out property and assets, failing to submit all forms, or committing costly or even fraudulent errors.
You must pay to file
If you’re in financial straits, the last thing you need is one more bill to pay. No matter how broke you are, however, filing bankruptcy isn’t free. For starters, the federal bankruptcy filing fee bankruptcy is $350.
Additional costs could include attorney fees, federal miscellaneous and administrative fees, and fees for required credit counseling and the debtor education course you must take before your debts can be discharged.
Bankruptcy won’t wipe out certain debts
Both chapter 7 and chapter 13 bankruptcy can help eliminate unsecured debts such as credit cards stop repossession, foreclosure, utility shut-offs, and wage garnishments, according to Experian. However, chapter 7 bankruptcy can’t eliminate court-ordered alimony or child support, tax debts, and student loans.
Bankruptcy stays on your credit report for years
When you file bankruptcy, the information stays on your credit report for either seven years for chapter 13 or ten years if you file chapter 7, according to major credit bureau Experian.
As long as a bankruptcy appears on your credit report, it negatively affects your score. The good news is that a bankruptcy won’t stain your credit forever, since the bankruptcy judgment automatically drops off your credit report either seven or ten years from the filing date.
The bankruptcy process isn’t quick
Even though you’re eager to put your debts behind you and move on, filing chapter 7 bankruptcy can take anywhere from four months to a year to complete. A chapter 13 filing takes longer – three to five years – since the court sets up a repayment plan so your creditor can recoup some money before debts are discharged.
How long it takes to complete the bankruptcy process depends on the number of assets you must liquidate, how easily you pass the means test and other specific details of your case.
Your bankruptcy will become public record
When you file bankruptcy, the case becomes a public record. That means the judgment shows up in bankruptcy court databases and on your credit report and is readily available to the public. Potential employers who perform a background check (with your permission) will also see information about the bankruptcy, which will show up on any background check.
Your financial secrets also become public record
In addition to filing the chapter 7 bankruptcy petition, you must also file schedules of assets and liabilities, a schedule of current income and expenses, a statement of your financial affairs, and a schedule of executory contracts and unexpired leases, according to UScourts.gov.
So if someone you’re dating or a gossipy coworker wants to know how much credit card debt you have, which loans you defaulted on and all about other debts, that person can easily look up the details for free at the federal courthouse in the proper jurisdiction or online for a fee.
This article by Deb Hipp was originally published on Debt.com.