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What is Bankruptcy? Definition, Types, and What you need to know
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What is Bankruptcy? Definition Types, Definitions and What You Need to Expect
Are you facing an overwhelming amount of debt, but you aren’t getting any results? The bankruptcy process could be the solution you’re looking for to get over the hump.
Written by Sean Pyles Senior Writer | Personal finance, financial debt Sean Pyles leads podcasting at NerdWallet as the producer and host of NerdWallet’s “Smart Money” podcast. The show “Smart Money” Sean talks with Nerds across NerdWallet’s NerdWallet Content team to answer listeners’ personal finance questions. With a particular focus on sensible and practical advice on money, Sean provides real-world guidance to help people improve the financial situation of their lives. In addition to answering listeners’ financial questions on “Smart Money,” Sean also interviews guests who are not part of NerdWallet and produces special segments to explore topics like the racial inequality gap and how to begin investing and the background for student loans.
Before Sean took over podcasting at NerdWallet, he covered topics related to consumer debt. His writing has been featured throughout the media including USA Today, The New York Times as well as other publications. When when he’s not writing about personal finance, Sean can be found working in his garden, going for walks, or taking his dog for long walks. Sean is located within Ocean Shores, Washington.
April 25, 2022
Edited by Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, managing money and debt Kathy Hinson leads the core personal finance team at NerdWallet. In the past, she worked for 18 years at The Oregonian in Portland in positions such as copy desk chief and team editor and designer. Her previous experience includes news and copy editing at various Southern California newspapers, including the Los Angeles Times. She received a bachelor’s degree in mass communication and journalism from The University of Iowa.
A majority of the products featured here come from our partners who pay us. This affects the products we review and where and how the product is featured on the page. But, it doesn’t influence our evaluations. Our views are our own. Here’s a list and .
Important lessons to take away
Bankruptcy is a legal tool to aid businesses and customers deal with debts that are too overwhelming. It’s a complex process recommended to be handled with the help of an attorney.
Chapter 7 and Chapter 13 are the two most commonly used by customers, whereas Chapter 11 is typically used for businesses.
The bankruptcy option may be appropriate if your total non-mortgage debt surpasses 40 percent of your income and the path to pay it off is not clear.
The effects of bankruptcy on your credit will be severe and will remain with you for many years, however you can get back your credit score as quickly as several months.
There are alternative debt relief options to consider for example, an .
What is bankruptcy?
The process of filing bankruptcy is legal that offers relief for people struggling to repay their debts. In the event of a bankruptcy, the consumer may be able to eliminate a portion of debt they are unable to pay or enter a repayment plan with better payment terms.
The bankruptcy filing can stop the phone calls, debt litigations and . The process can be complicated, and it is recommended to hire an attorney, but you’re likely to be able to see some areas of your financial situation improve within six months of filing. Be aware that certain debts, like student loans or recent tax payments and child support, typically can’t be wiped out in bankruptcy.
What are the different types of bankruptcy?
The two most commonly used types that are used for consumer bankruptcy . Chapter 11 bankruptcy is typically used by businesses.
Here’s the breakdown:
Chapter 7 bankruptcy
Known as “liquidation” since most non-secured debts are forgiven, is the fastest and most popular type of bankruptcy.
The best option for consumers who are primarily in debt that is unsecured like medical bills credit card debt, credit card debt or personal loans.
You must pass the , that determines if you are eligible to be a Chapter 7.
It is not possible to have had a Chapter 7 discharge or a Chapter 13 discharge in the past six years.
Do not have to have filed a bankruptcy petition within the past 180 days, which was then rejected because you did not show up in court or to adhere to court orders, or voluntarily dismissed your own filing due to creditors seeking court relief to recover the property they held a lien on.
Chapter 13 bankruptcy
Also known as the “wage earners” bankruptcy, it allows debts to be restructured into a repayment plan spread over three to five years.
The best option is for those with assets they would like to keep, such as costly jewelry, or secured loans they want to get up to date, like the mortgage.
You must have regular income.
You must be current with tax filings.
You have been charged for Chapter 13 in the past two years, or Chapter 7 within the last four years.
It is not possible to file bankruptcy within the previous 180 days that was dismissed for certain reasons for example, failing to show up in court or to follow the orders of the court.
Chapter 11 bankruptcy
Also known as known as a “reorganization” bankruptcy, this chapter is typically utilized by companies and other businesses.
The best option for companies who want to continue operating.
Do not have to have filed a bankruptcy petition in the previous 180 days, which was rejected because you did not appear in court or comply with court orders, or have voluntarily withdrawn your bankruptcy filing due to creditors seeking court relief to reclaim the property they held a lien on.
Are you a good candidate for bankruptcy?
Filing for bankruptcy is never an easy choice, and you’ll have to weigh the pros and cons of longer-term implications on your debt and credit. But in general, if:
There is there’s no way to pay your debts within five years.
Your total debt (excluding a mortgage) is more than 40% of your earnings.
You’re paying as much as you can toward your debts, but aren’t making progress.
In the event of debt, it is hindering you from achieving the other goals of your finances, such as investing for retirement.
If you’re thinking about filing for bankruptcy and want to know more, you can get free consultations with a bankruptcy attorney and a to better understand your financial situation and determine if bankruptcy is the best choice.
Do you need an attorney in bankruptcy?
The short answer: Yes.
Bankruptcy is a long and complex procedure. One form improperly filled out could lead to the denial of your bankruptcy case. This means that you will need to wait six months to file again. to help you navigate the process and make sure your documents are filled in correctly.
A word of caution when you’re contemplating filing without an attorney: The bankruptcy data shows that only 1.4% of Chapter 13 bankruptcy cases filed without an attorney in 2012 were granted a discharge, meaning the cases were dismissed and eligible debts forgiven, according to the Federal Judicial Center.
of Chapter 7 bankruptcy cases filed with an attorney in 2012 95% of them were successful in resolving as opposed to two-thirds of the cases filed without an attorney, according to data from the center.
A lot of bankruptcy attorneys will demand payment before filing, but you have options to help .
How long will bankruptcy remain on your credit report?
Filing for bankruptcy is the single most damaging action you can take to your credit score, because it .
However, there’s an opportunity to improve your credit could begin to improve after a few months of making the application, and the improvement may be especially marked when you’re already in default on your obligations.
A report released in 2014 by the Federal Reserve Bank of Philadelphia discovered that those who filed Chapter 7 bankruptcy saw their scores improve from an average of 538 up to an average 620 on a 300-850 scale when the case was discharged which usually takes six months.
There are also steps you can take to assist .
Learn: for Canadians?
What are alternatives to bankruptcy?
The type as well as the amount that you have there may be other options that could help resolve your debt.
Use this calculator to explore your debt relief options, such as an approach to managing debt from an agency for credit counseling that is non-profit or do-it-yourself techniques, as well as consolidation.
Be aware of where every penny goes
Find ways to spend your money on things you enjoy and less on things that you don’t.
Author bios: Sean Pyles is the executive producer and host of NerdWallet’s Smart Money podcast. His writing has appeared in The New York Times, USA Today and elsewhere.
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