Bancruptcy is the most common misspelling for bankruptcy. Regardless of how it’s spelled, the word is associated with financial devastation. While many people believe filing personal bankruptcy will end financial woes, nothing could be further from the truth.
Filing bancruptcy today is not as easy as it used to be. In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act. BAPCPA includes new provisions which require debtors to undergo the ‘means’ test to determine how much of their outstanding debts must be repaid.
Most debtors are required to file personal bankruptcy under Chapter 13. Payment plans can extend for two or more years which can cause serious financial constraints. Not only must debtors submit regular payments to the U.S. Trustee, they are prohibited from incurring new debts while the Chapter 13 payment plan is in place.
When debtors are incapable of adhering to their payment plan, one of two things can occur. Bankruptcy lawyers can petition the court to obtain Chapter 7 bankruptcy for their client or creditors can petition the court seeking dismissal of the bankruptcy petition.
Chapter 7 is known as liquidation bankruptcy because debtors are required to liquidate assets to pay outstanding debts. Property is typically turned over to the bankruptcy Trustee who either returns property secured by a loan or sells property through liquidation auctions. Funds obtained through the sale are used to pay off outstanding debts and remaining balances are written off. When creditors submit petitions for bankruptcy dismissal, debtors fail out of bankruptcy and lose court protection.
It is estimated that 2 out of 3 debtors fail out of bankruptcy. It is crucial to develop a reasonable Chapter 13 payment plan that offers a bit of wiggle room if unexpected expenses arise. It is also crucial to develop a household budget and stick to it no matter what. Failing out of bankruptcy leaves debtors owing their entire debt-load and can easily result in repossession of assets, wage garnishment, or real estate foreclosure.
Prior to obtaining bancruptcy approval, debtors must obtain credit counseling through a U.S. Trustee approved agency. Debtors are allowed to enter into credit counseling 180 days prior to submitting their bankruptcy petition. Depending on the level of outstanding debt, credit counseling may eliminate the need for filing personal bankruptcy.
Debtors may want to obtain credit counseling through one of the approved agencies before submitting their bankruptcy petition. If credit counseling does not eliminate the necessity of bankruptcy, debtors will have met BAPCPA requirements and will not have to undergo credit counseling a second time.
Debtors should research bankruptcy alternatives such as budgeting, credit counseling, debt consolidation, and debt settlement. These alternatives may provide the same results as bankruptcy without the devastation to credit scores.
Bankruptcy remains on credit reports for 7 to 10 years and can cause a substantial reduction to FICO scores. Reduced credit scores can place debtors in a lower credit bracket, which can prohibit them from qualifying for any type of credit for years to come. Those fortunate enough to obtain credit will generally pay higher rates of interest and have limited lines of credit.
If bancrupty is the only option, debtors must work with a qualified bankruptcy lawyer to ensure they comply with BAPCPA regulations.