Filing for bankruptcy is a big decision, and it shouldn’t be taken lightly. For most people filing bankruptcy is considered a last resort option to alleviate financial hardship and escape excessive debt.
While going through bankruptcy may provide a second chance to bring your finances under control, it also has a variety of negative consequences that must be carefully managed and considered. If you move forward with filing bankruptcy, it can be important to spend some time organizing financial paperwork so that the process is as seamless as possible.
In this post, we’ll discuss what you need to know about chapter 7 bankruptcy, and whether or not it’s right for you. Let’s dive in.
How Does Bankruptcy Work?
Bankruptcy is a legal process facilitated by a bankruptcy court. When someone files for bankruptcy, it’s generally an attempt to find relief from debt. However, it can also be a stepping stone to exploring what financial goals are and which ones are right for you.
Since bankruptcy can help individuals and businesses eliminate some or all of their debt and repay some of what they owe, it can provide financial relief. If you’re considering filing bankruptcy, understanding the process is essential.
What is the Downside of Filing for Bankruptcy?
Filing for bankruptcy is a serious financial decision, and it has long-term impacts on your credit and financial life. So, what happens when you file bankruptcy? Here are a few things to be aware of:
- Bankruptcy will appear on your credit report for up to ten years, or longer if you apply for a loan of $150,000 or greater.
- If you had good credit before you filed for bankruptcy, filing will create a sharp drop in your credit report.
- Once you’ve filed for bankruptcy, you will probably not be able to qualify for a mortgage or car loan for several months or years. When you do qualify for a loan again, you’ll be considered a “higher risk borrower,” and will pay higher interest and fees on the loan, as a result.
- If you file for Chapter 7 bankruptcy, you’ll be barred from accessing another Chapter 7 bankruptcy discharge for eight years. If you file for Chapter 13 bankruptcy, you’ll be barred from accessing another Chapter 13 discharge for four years. If you anticipate additional financial hardship in the future, this may be a problem and is something you should be aware of.
For more information on the differences between Chapter 7 and Chapter 13 bankruptcy, consult this guide.
Does Filing for Bankruptcy Discharge Every Type of Debt?
While many people regard bankruptcy as a kind of financial “do-over,” it’s important to note that filing for bankruptcy does not discharge every type of debt. Certain types of debt, including a student loan, new or recent tax debt, child support, and alimony payments are not impacted by bankruptcy filings.
The debts that will be discharged, however, include credit card debt and charges (including overdue and late fees), medical bills, personal loans, past due amounts on utility bills, some student loans (if you can prove that repaying them would cause undue hardship), business debts, money owed according to lease agreements, old tax penalties, some attorney fees, and more.
If you’re considering filing for bankruptcy, be sure to talk to a bankruptcy attorney or tax professional about the implications beforehand. It’s also important to know how long to keep financial records so that you know which ones your bankruptcy attorney might need and from how long ago.
Will I Lose My Car If I File For Bankruptcy?
If you file for bankruptcy, you’ll get rid of some problematic unsecured debts, but it may also require you to relinquish some of your assets. Fortunately, your car is not one of those assets. Knowing the full bankruptcy process is key and if you’re filing for Chapter 7 bankruptcy, the law allows you to exempt the equity in your car. It would probably also be beneficial to set some financial goals and a repayment plan with a CPA or financial advisor. Start by exploring a CPA vs financial advisor to figure out which is right for your situation.
This means that, as long as you’re current on your loan payments (and the value of your car is less than the exemption amount), you’ll be allowed to keep your vehicle. You’ll likely also maintain most of your retirement accounts and some other assets.
Should You Consider Filing for Bankruptcy?
The decision to file for bankruptcy is a large one, both financially and emotionally. It's important to first evaluate any bankruptcy relief or bankruptcy protection opportunities that are available to you. To decide if bankruptcy is the right decision for you, start by asking yourself these questions:
- Have you tried to negotiate with a creditor? While it’s not a comfortable process, you can negotiate with your creditors to settle a debt for a lower amount than you owe. If you’re already behind on payments, consider reaching out to the companies to negotiate a settlement.
- Have you hired a credit counselor? Hiring a professional credit counselor can help you lower your monthly payments and interest rates. If you’re considering filing for bankruptcy, Chapter 7 bankruptcy law requires you to get credit counseling for six months before you file.
- Is the government garnishing your wages? If your wages are already being garnished, filing for bankruptcy may be a wise step to reclaim some of your money and get life back to normal. Whether it be tax debt or credit card debt, understanding bankruptcy law can help you find some debt relief.
- Do you have medical bills that your insurance won’t cover? Medical bills are the leading cause of bankruptcy. In fact, 66.5% of all bankruptcy claims in the U.S. in 2019 were due to medical bills. If you have medical bills you can’t afford to pay, bankruptcy may provide some debt relief. In most cases, a filing will discharge the bills completely, or establish a 3-5 year payment plan.
- Do you have assets? If you don’t own assets, or if the assets you do possess are worth less than your debt, filing for bankruptcy might be smart. If you have secured debt (assets secured with a loan and a monthly payment - such as a home or a car), filing for bankruptcy may prevent you from losing these things.
- Do you have savings? Part of the bankruptcy filing process is listing out your assets. While certain assets are protected, savings accounts generally are not and if you're setting aside part of your income regularly, you might want to reconsider until you decide on filing bankruptcy or not. If you have savings with which to pay your debt, it may be wise to start there, instead.
How Pillar Can Help Organize Your Financial Life
Whether you’re considering filing bankruptcy, in the process of Chapter 7, or just looking for a secure way to store your important financial documents, Pillar App is here to help. A leading platform for financial record keeping, Pillar helps you know how to organize bills, statements, banking and loan paperwork, passwords, and more.
To learn more about how Pillar can help you navigate bankruptcy, try it for free today.