Bankruptcy

If you are struggling to pay your monthly credit cards bills, you may be wondering if bankruptcy is an option for you. Bankruptcy provides a path to a fresh start, financially, but not everyone qualifies.

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Chapter 7 Bankruptcy

Chapter 7 bankruptcies are designed to liquidate the debtor’s assets. All property, except that which a petitioner is allowed to keep, is turned over to a bankruptcy trustee who disburses the debtor’s funds to creditors in an effort to repay part of the debts that are owed.

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Chapter 13 Bankruptcy

Chapter 13 bankruptcies are debtor reorganization proceedings that encourage the consumer to repay as much of the debt as possible. A regular income is required to secure a Chapter 13 repayment plan, which usually lasts three to five years.

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Bankruptcy Education Courses

Approved by the U.S. Trustees, InCharge issues Bankruptcy Code-compliant certificates for required pre-filing counseling and pre-discharge education. If you file for bankruptcy, you must attend a Pre-Filing Credit Counseling session. After filing, you must complete Pre-Discharge Debtor Education before your bankruptcy is finalized. InCharge offers both of these educational courses.

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If you are struggling to pay your monthly credit cards bills, you may be wondering if bankruptcy is an option for you. Bankruptcy provides a path to a fresh start, financially, but not everyone qualifies.

How to qualify for bankruptcy?

There are two main types of consumer bankruptcy: Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy filing, the consumer’s assets are liquidated to pay their debts. Any remaining debts are forgiven. In a Chapter 13 bankruptcy, the consumer is deemed to have sufficient income to repay at least a portion of their debts and does so over a number of years.

Bankruptcy Means Test

In order to qualify for a Chapter 7 bankruptcy, you must pass a bankruptcy means test. First, determine your current monthly income by adding your gross income from the past six months and dividing by six. For example, if your gross income was $4000 per month from January to April, but you were laid off and had no income in May and June, you would add calculate your current monthly income as follows:

$4000 + $4000 + $4000 + $4000 + $0 + $0 = $16,000

Next, divide by the 6 months.

$16,000 ÷ 6 = $2666

After you’ve determined your current monthly income, check to see if it is above or below the median monthly income for your state. If it is below, you qualify for Chapter 7 bankruptcy and do not need to do any further calculations.

If Your Income Exceeds the State’s Median Income

If your income is above your state’s median monthly income, the next part of the means test involves deducting reasonable and allowable expenses from your income (expenses like food, housing and transportation). If it is determined, after making these deductions, that you have reasonable income remaining to make your debt payments, you will not qualify for a Chapter 7 bankruptcy. In this case, you can pursue a Chapter 13 bankruptcy, keep your assets, and work to paying off a portion of your debts, as determined by the bankruptcy court.

In 2013, about 1 million Americans filed for bankruptcy protection. Chapter 7 bankruptcies accounted for about 70% of these filings, with Chapter 13 accounting for the other 30%.

Alternatives to Bankruptcy

If your income is too high for a Chapter 7 bankruptcy, you may be wondering what other options are available to you besides a Chapter 13 filing.

A debt management program administered by a nonprofit credit counseling company can offer many of the same benefits of a Chapter 13 bankruptcy, including lower monthly payments, the end of collection calls, interest rate reductions and the ability to pay debts off over 3-5 years. A debt management program does not affect your credit score in the same way that a bankruptcy does.

To see if you qualify for a debt management program, you can either speak to a Certified Credit Counselor via telephone or use InCharge’s online counseling tool.

Debts Discharged in Bankruptcy

The bankruptcy code allows you to discharge the following kinds of debt: credit card, auto loan, mortgage, medical debt, utility bills, and personal loans.

Debts Not Discharged in Bankruptcy

The following debts are generally not dischargeable through bankruptcy: tax debt, alimony, child support, and student loans. Debts resulting from luxury item purchases and cash advances immediately prior to your filing can be challenged by your creditors and possibly excluded from discharge. If you are struggling with IRS debt, it is possible to work out a payment plan through a Chapter 13 bankruptcy.

How Long Will a Bankruptcy be on My Credit Report?

According to national credit reporting bureau Experian, a Chapter 7 bankruptcy will remain on your credit report for ten years. A Chapter 13 bankruptcy will remain on your credit report for seven years.

Should You File for Bankruptcy?

If you’re unsure whether you should file for bankruptcy, consider dedicating 20-30 minutes to a free, no-obligation credit counseling session. You’ll be provided with an unbiased recommendation based on your income and debts. If your recommended solution is bankruptcy, we can provide you with a bankruptcy attorney in your area with whom you can schedule an appointment.

Bankruptcy Pros

  • Pardons debts, or reduces debts for individuals in severe financial distress due to circumstances such as illness or loss of a job.
  • Can temporarily prohibit creditors from seeking foreclosure of a home or repossession of a car.
  • You may not qualify for loans for several years, especially mortgage or home equity loans. If you are able to get a loan, you will not qualify for the lowest interest rates.
  • Can temporarily prevent wage garnishment, debt collectors’ harassment, and disconnection of utilities.

Bankruptcy Cons

  • Puts a blemish on an individual’s credit record for 10 years, causing difficulty in obtaining cars, homes, and loans.
  • Is a notice of public record that may be seen by potential employers, insurance companies, banks, and other lenders.
  • Bankruptcy can be seen as a social stigma that can cause feelings of guilt and embarrassment.