Know when to file for bankruptcy

Life doesn’t always go according to plan. You may need to debt burden that goes beyond your monthly payments. Now you are wondering how to get your financial situation back in order.

Knowing when to file for bankruptcy is a valuable skill for individual consumers and small business owners. Learn more about it and determine if it’s the best move for your financial needs.

What is bankruptcy?

Bankruptcy is a legal process started by people with too much debt. They must sign a federal petition to review their financial obligations or outstanding debts before asking creditors to work with them to settle their debt with any assets. which is left.

What are the types of bankruptcy?

People can accumulate too much debt as an individual consumer or business owner, so many types of bankruptcy exist to deal with those situations. These are specific chapters outlined in the U.S. bankruptcy code that you can consider if you find yourself insolvent.

Chapter 7: Personal liquidation

Most people who need to file bankruptcy straight for personal debt will file under Chapter 7. Federal courts appoint a trustee to assist the individual in selling property to repay a lender or creditor. You can request a specific property exemption from Chapter 7 bankruptcy, such as your car, pension, or household equity.

Chapter 11: Bankruptcy reorganization

Small business owners can file for Chapter 11 bankruptcy to rearrange their assets, jobs, and debts. If this set of factors exceeds $5 million, a judge will come in to guide you through the process.

This can be a useful step for business owners as it allows the company to remain open and operational while the restructuring takes place. Creditors can also file for Chapter 11 bankruptcy if the debtor doesn’t come up with an idea first.

Chapter 13: Property Maintenance and Repayment Plan

Individuals who apply for Chapter 13 Bankruptcy may keep their assets but must repay the debt within three to five years of the court approving their plan. You won’t have to liquidate anything if you don’t miss or skip any payments. Most of the people who did not receive this bankruptcy approval were workers with no reliable source of income.

When to file for bankruptcy as an individual?

Before filing for bankruptcy, it is essential to negotiate with your debtors or creditors. They’ll still get your money back if there’s a way for you to make payments long-term and ultimately pay off your debt more efficiently.

Sometimes the debtor will negotiate for that reason. However, they may not do it if they don’t see a viable path forward due to your history or financial situation.

When negotiation can’t be done and you’re about to lose your home or other essential assets because you can’t make your monthly payments, it may be time to file for bankruptcy. First, schedule a credit counseling session to get the correct certification for the type of bankruptcy you require.

A counselor will review your assets and liabilities during that session and find the best solution for your needs, even if it’s not bankruptcy. You can find these professionals by contacting federal credit counseling agencies.

You may feel worried that your existing assets or net worth will not be enough to pay your debts. If that’s the case, your most senior credit facility will set up a financial solvency plan to settle the outstanding balance with your credit counselor. By making any necessary modifications, your minority lenders will follow top-level decisions if they make a plan in good faith.

When to File for Bankruptcy as a Business

When debtors fail to negotiate with small business owners about their loans, it may be time to file for bankruptcy. Usually this means a Chapter 11 case, which has some pros and cons for people running small companies.

You can benefit from this bankruptcy type if your creditor or debtor does not meet to discuss new contract terms. Instead, the federal case will bring everyone to the same table to discuss options like extending payment terms for real estate, equipment, or manufacturing loans.

Small business owners also don’t have to immediately liquidate their company or assets to pay off debt. Instead, they can remain open and operational because Chapter 11 prioritizes repayment plans approved by the federal courts. The trustee becomes the facilitator overseeing ongoing payments once both parties reach agreed terms.

Small business owners are hesitant to file for bankruptcy because it can become an expensive, difficult process. Depending on the court calendar and how easily the debtor agrees to the payment plans, you could expect to pay an average of $19,738 just for filing and attorney fees.

Additionally, you will have to make initial payments during the first few months of your plan deal. That can be a challenge after paying legal fees while continuing to run your day-to-day business.

How to File for Bankruptcy?

Many steps are involved in filing for bankruptcy. First, familiarize yourself with the process before making any final decisions.

1. Review your options

Remember, bankruptcy may not be necessary for your situation. Eliminating debts like student loans and unpaid taxes will give you some relief while considering merge or settle. You will need yours financial history and credit reporting paperwork to make the best decision.

2. Select Bankruptcy Type

If you decide that bankruptcy is right for you or your business, you will need to choose from Chapters 7, 11 or 13. Personal or business bankruptcy is the first way to narrow down your options. . You can then decide based on your current asset value, outstanding debt, and income.

3. Decide to find a lawyer

The American Bar Association and state associations have lists of attorneys ready to assist people in filing for bankruptcy. Legal aid clinics and free services can also help if you can’t afford legal help but want representation.

The option to represent yourself is also known as going pro. You won’t have to pay attorney fees, so you’ll save most of your filing costs. However, you may not get the debt relief you need. A recent study showed that less than half of professional cases resulted in debt forgiveness, while 93.9% of representative cases did so.

4. Pass the credit counseling course

Everyone filing for bankruptcy of any kind will be required to take a credit counseling course. It helps people weigh their options to determine the best course of action, whether it’s bankruptcy or other forms of debt relief. If you completed your class more than 180 days before applying, you will have to retake the exam closer to the official application date.

5. Complete your consultation and legal forms

After meeting with a credit counselor and completing your course, you will have to fill out all relevant forms. There are many people involved in any bankruptcy, so preparing for this step takes time. The forms include your financial history, statements, fees and other relevant information. Your attorney can help if you choose to be represented.

6. Fee Payment and Application Form

Your paperwork also comes with many fees. Filing fees, administrative work, and even surcharges if a trustee will oversee payment plan arrangements with your debtor. Sometimes people can be exempt from these fees, but only if their income below the poverty line 150% determined by a federal court.

7. Negotiate with your creditors

Whether you go to court or not, your creditors will sit down with you after you pay your fees and file all the necessary paperwork. They will review your situation and determine the best way to repay you. Any agreement made at this time will be legally binding, as the meeting takes place under oath.

8. Attend Debtor Education Classes

You must complete education classes after applying if the lender repays you. This ensures that you have learned to manage your finances better based on your performance in lessons and tests. You will need to pay class fees and earn a final certificate to complete your bankruptcy.

What life looks like after applying

What will your life be like after bankruptcy? It depends on how you apply and your circumstances.

Chapter 7 bankruptcies remain on credit records for a decade after both parties settle outstanding debt. On the other hand, a Chapter 13 bankruptcy will only last for seven years.

You will also reduce your credit score no matter how you decide to apply. That can make it more difficult or impossible to get money from insurance companies and investors if you need to expand your business or recover from an emergency.

If you face significant debt immediately after bankruptcy, you may have to shoulder it alone for many years. There are limits to how often people can file specific bankruptcy chapters.

Debts that do not include bankruptcy

You may not need to file for bankruptcy if you owe money for unqualified reasons. Here are some types of debt that federal courts do not include in bankruptcy filings:

  • Unpaid utility bills
  • Personal loan
  • Credit card debt
  • Medical bills
  • Short-term loans
  • Overdue rental bill

Contacting a legal representative or credit advisor will help determine if your debt qualifies for bankruptcy or if you need alternatives.

Know when to file for bankruptcy

Knowing when to file for bankruptcy is essential to Manage your finances. It can make things brighter or not be a part of your future. Talk to a professional to see if it’s the best way to manage your debts while maintaining your personal or professional life.

First published on due date. Read here.

Featured Image Credits: Pictures of Nicola Barts; Bark; Thank you!

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