Should I File Bankruptcy?

Has your financial situation got so out of hand that bankruptcy seems like the only plausible solution? But before you file bankruptcy through the court system, it’s best to take a step back and assess your situation to determine if this is the best course of action. You should also understand your options and seek professional guidance before moving forward.

How Bad Is Your Financial Situation?

When the debt collectors are calling, your credit rating is tanking, and you’re tossing and turning every night thinking about how you’re going to get out of the debt hole, you may be inclined to do whatever it takes to find relief quick, fast, and in a hurry. But is your situation really that bad that it warrants a bankruptcy filing?

Some questions to ponder:

  • Do you rely on credit cards to survive?
  • Are you working several jobs to afford the minimum payments on your debts?
  • Can you only afford to make the monthly minimum payments on your credit cards?
  • Do you struggle to make the minimum payments on your credit cards because of penalty APRs, which have caused the balances to skyrocket even more?
  • Have you cashed out your retirement fund to pay down debts but are still struggling to stay afloat?
  • Are you wages being garnished to satisfy judgments?
  • Have you drastically minimized your lifestyle to survive, but the debt payments are still too excessive?
  • Are you avoiding debt collectors because you’re overwhelmed and don’t have the funds to pay them?
  • Are you too embarrassed to review your billing statements to determine how much you actually owe?
  • Is your debt load causing your stress levels to increase and impacting your everyday functionality?

The Case for Bankruptcy

While your credit will take a hit when filing for bankruptcy, there are several reasons why this option may be the best course of action for your financial situation.

Could prevent further damage to your credit score.

Most financial experts stress the long-lasting impact bankruptcy will have on your credit profile, particularly the fact that it will linger on your credit report for 10 years. And you will also see your credit score dip once the negative data hits your credit report. But what they don’t mention is the fact that your credit score is more than likely already mangled before your file bankruptcy as a result of late payments, new collection accounts, and charge-offs. So, filing for bankruptcy will, in essence, give you a clean slate and cause the madness to stop. Consequently, you will see your score start to improve (assuming you refrain from any additional debt mismanagement).

Halts collection efforts.

This means that you won’t have to walk around each day with a pit in your stomach in or sweat bullets each time a debt collector calls. When you file bankruptcy, debt collectors can no longer call and pester you about debts you know you can’t afford to pay. Even better, they won’t be able to drag you to court or seek a judgment against you which could possibly lead to wage garnishment.

Gives you peace of mind.

Your mental health is beyond important. And if a high debt loan and constant financial stress are taking you over the edge, chances are your performance at work is plummeting or you find yourself having a difficult time making it through the day. In this case, filing for bankruptcy can help mend your fragile mental state so you can embrace life and focus on what matters most because you are defined by more than your debt load or credit score.

What Are Your Options?

Not all bankruptcy filings are created equal. Here’s what you need to know about each before you file bankruptcy:

Chapter 7 Bankruptcy

Also known as liquidation, Chapter 7 bankruptcy will take your debts off your plate so you no longer owe creditors. But in order for your debts to be discharged, your assets will be liquidated or sold to repay your creditors (even if they only receive a fraction of what you actually owe). Consequently, a major downside is that despite having a clean slate, you may not get to retain assets that you wish to keep in your possession.

According to Alllaw.com, the following debts are dischargeable under Chapter 7 Bankruptcy:

  • Credit card debt
  • Government benefit overpayments
  • Medical bills
  • Personal loans
  • Qualifying tax debts
  • Secured debts associated with a surrendered property
  • Select monetary judgments
  • Unpaid rent obligations
  • Utility bills

Chapter 13 Bankruptcy

When you file Chapter 13 bankruptcy, you are agreeing to what’s called “reorganization” which means you’ll repay your debts over the next three to five years. While your debts won’t be completely discharged, you’ll be able to retain possession of your assets. And once the repayment period is up, the remaining amounts that you owe will be discharged. This form of bankruptcy may be the best option if you prefer to keep your assets and have a steady source of income to make monthly payments.

According to Alllaw.com, the following debts qualify for cancellation under Chapter 13 Bankruptcy:

  • Credit card debt
  • Debts associated with property damage that resulted from willful or malicious intent
  • Debts associated with nondischargeable tax debt
  • Debts associated with property settlement agreements arising from legal separation or divorce
  • Debts associated with a prior bankruptcy filing that was not approved for discharge
  • HOA or condo fees accrued after the filing date
  • Medical bills
  • Personal loans
  • Qualifying tax debts
  • Retirement account loans
  • Select government fines (excludes penalties derived from criminal activity)
  • Utility bills
  • Select monetary judgments

Is Bankruptcy the Best Choice?

Again, it depends on your financial situation. In other words, there are no one-size fits all answers. But if your debt is getting the best of you, financially and emotionally, or if you’re struggling to make basic ends meet, it may be time to take a hard look at your options and possibly consult a bankruptcy attorney to determine if filing could grant you the relief you need.

The Complete Guide to Filing for Bankruptcy

Imagine waking up one morning and not worrying about debt collectors banging down your door or final notices arriving in the post. Or being able to go to work or the shops without debt casting a shadow over your life. For people burdened with debt, bankruptcy can make this dream a reality.

But bankruptcy should never be a spur-of-the-moment decision or viewed as an easy way out. It is a long, complicated process that can have consequences that extend well beyond your finances. Deciding on bankruptcy can be tough, but this guide is here to help.

Continue reading to discover how types of bankruptcy differ, how filing for bankruptcy works and whether bankruptcy is right for you.

An introduction to bankruptcy

Bankruptcy is a legal process that declares your inability to pay outstanding debts and helps you to settle them. It also gives you immediate relief from creditors and debt collectors.

There are three common forms of bankruptcy in the U.S—Chapter 7, Chapter 13, and Chapter 11. Each is different but all of them can give individuals a second chance.

Chapter 7 bankruptcy

Chapter 7 bankruptcy is the quickest and cheapest form of bankruptcy and the only way to discharge all debt. But it can only be used by individuals who pass a means test and who earn less than or equal to their state’s median income. Most of your assets will be seized and sold to cover outstanding balances at the start of the process, but you can file for exemptions on major items such as your home or your car. Exemptions vary between states but most set an upper limit on an item’s value over which the asset must be sold.

Chapter 7 exemptions can be a grey area, and it would be sensible to hire a bankruptcy lawyer to ensure you keep as many assets as possible. Most states will allow you to subtract outstanding loan amounts from the value of your asset, for example. So if you have a $400,000 house but still owe $200,000, it will fall under a $250,000 asset limit.

Chapter 13 Bankruptcy

Chapter 13 is the most common alternative for individuals who don’t pass the Chapter 7 means test. Unlike Chapter 7, you get to keep all of your assets, and you can stop your home from getting repossessed, but you must establish a payment plan to pay off the outstanding debt over a three to five year period. There are still qualifying criteria for Chapter 13 bankruptcy, however, which include having unsecured debt under $1,149,525 and secured debt under $383,175.

Strict rules govern what you must pay back and for what period. Secured debts (your mortgage), priority debts (child support, alimony, and taxes), and administrative fees must be paid in full. And unless you earn less than your state’s median income, you’ll be repaying debt for the full five years. Finally, total repayments over the grace period must total the value of your assets at a minimum. The good news is that any debts that remain after the grace period are discharged in full. Failure to adhere to these rules, however, can result in the loss of assets.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is typically used by small businesses, but it can also be used by individuals with debts exceeding Chapter 13’s limits. Both Chapter 11 and Chapter 13 see debtors pay back priority debts and a certain amount of unsecured debt over a five-year repayment plan. But with Chapter 11, there is no way to shorten the repayment period, regardless of how much you earn. Unfortunately, due to the complex nature of Chapter 11, it is the slowest and most expensive form of bankruptcy.

How does Filing for Bankruptcy Impact your Life?

Bankruptcy isn’t a silver bullet, and the process can have a significant impact on your life that goes far beyond financial implications. You can expect the following scenarios to happen if you file for bankruptcy:

Your credit score to plummet

Bankruptcy can stay on your credit report for ten years, and it will cause your score to drop by around 200 points. A lot of credit will be off limit as a result, and interest rates are likely to be extremely high when you eventually do get approved.

You won’t be able to buy a house in the near future

The impact on your credit score will make it impossible to get approved for a mortgage for at least five years.

You may struggle to find employment

Employers can perform credit checks, and they will see your bankruptcy. Private and public organizations aren’t allowed to discriminate against bankrupts, but many still do.

It can impact your relationships

Bankruptcy carries a certain stigma, and it can create friction between friends and loved ones. Financial stress is a major cause of divorce in particular.

If you aren’t ready to face these issues, bankruptcy may not be the right decision for you.

Is Bankruptcy right for you?

We hope this guide has helped you decide if bankruptcy is right for you. But if you still need advice, your first move should be to talk to a licensed credit counselor. This is a requirement under Chapter 7 bankruptcy, so you have nothing to lose, and they may even help you develop a repayment plan of your own.

If you are committed to moving forward, the next step is to contact a bankruptcy attorney. It is possible to represent yourself but the process is complicated, and you will save time, money and stress by hiring a lawyer.

Chapter 7 Bankruptcy FAQs: Everything you need to know

Chapter 7 offers something every debtor dreams of: a fresh start with no more debt. But there’s more to bankruptcy than meets the eye. Only certain people qualify for one and it may not cancel out all of your debt. If you’re deciding to move ahead with Chapter 7, here are the answers to all of your questions.

What is Chapter 7 Bankruptcy?

Chapter 7 bankruptcy writes off certain types of outstanding debt while allowing individuals to retain exempt assets like a house or car. It gives debtors a fresh start, free from the burden of debt, but you must pass strict criteria to qualify.

Who is eligible to file for Chapter 7?

Only individuals who pass a means test and receive credit counseling 180 days prior to filing are eligible for Chapter 7 bankruptcy. Businesses and individuals who earn too much cannot use Chapter 7 to discharge debts.

How do you pass the means test?

There are two ways that individuals can pass the Chapter 7 means test. The first is by having a monthly income that is lower than their state’s median monthly income.

If your income is too high, you can also qualify by proving that the amount you owe exceeds your disposable income by a certain amount that varies by state.

In both cases, the average monthly income is calculated using figures from the previous six months. As such, it may be beneficial for some individuals to delay filing for Chapter 7 until their six-month average income is a fair reflection of their financial situation.

What is credit counseling?

Individuals must attend a government-approved credit counseling session within a 180-day period before applying. The counselor will discuss alternatives to bankruptcy and determine if steps such as establishing a budget can help you pay off your debts.

What are asset exemptions?

Chapter 7 provides exemptions for certain assets such as your house and your car, providing that they fall below a certain value determined by your state. Anything that is not exempt can be liquefied by your creditors to pay off your outstanding balance.

What is the process of Chapter 7?

After you have completed the necessary credit counseling session, you’ll need to file a petition at your local federal bankruptcy court. This will include filing several forms detailed below and paying the fee to file the case.

You will experiences the benefits of bankruptcy immediately. An automatic stay will stop debt collection agencies from contacting you and wage garnishment will also cease and possibly even reversed. Once the paperwork has been confirmed by the court, they will appoint a bankruptcy trustee to your case and you will need to meet with them to discuss your financial situation. Based on the evidence that you present, they will decide whether or not your case will be accepted.

If the trustee accepts your case, most of your debts will be discharged immediately. But not all of them. Priority debts, such as alimony and child support, as well as debts for federal or state loans, criminal debts, and tax debts cannot be discharged and will need to be paid in full.

This entire process should happen within the space of six months and is usually concluded much faster.

What paperwork is involved in Chapter 7?

You can file for Chapter 7 on your own, but most applicants seek professional advice from a lawyer. The process is complex, procedures must be followed carefully and you will need to submit the following documents:

  • Schedules of assets and liabilities
  • Your current income and exposure
  • A statement of financial affairs
  • A schedule of executed contracts and current leases
  • A copy of your most recent tax return and any filed during the case

This alone can be difficult for a self-applicant. But you will also be expected to submit the following:

  • Your certificate of credit counseling
  • A copy of your debt repayment plan if applicable
  • Evidence of payment from employers for the previous two months
  • A statement of monthly income and anticipated changes
  • Records of interest in state or tuition accounts

That’s not all, either. To complete the necessary forms, you’re going to need to compile the following:

  • A complete list of creditors and the amounts you owe
  • Detailed information about your income
  • A list of property you own
  • An itemized list of your living expenses

Sound like a lot of work to you? That’s why most people hire a lawyer.

Do I need a lawyer?

You are free to represent yourself but having a lawyer is highly recommended. Not only will they take care of filing all the information listed above, but they will also be liable for mistakes. That means they’ll be on the hook if your case gets tossed due to human error.

Are there any fees involved?

Filing for bankruptcy isn’t free and you’ll have to pay the following fees to file for Chapter 7:

  • A case filing fee of $245
  • An administrative fee of $75
  • A trustee surcharge fee of $15

You will also need to pay your bankruptcy lawyer if you use one. All of these fees can be paid in installments, and court fees can be waived if you live far enough below the poverty line.

Can married couples file jointly?

Yes, married couples can file jointly under Chapter 7, and only one set of forms and one filing fee is required if they do.

Can your Chapter 7 bankruptcy case be dismissed?

Yes, and there are several reasons why your Chapter 7 case may be dismissed. Among the most common are:

  • Failing the means test
  • Making mistakes on files and applications
  • Failing to complete credit counseling
  • Failing to pay associated fees
  • Not attending court
  • Failing to meet your trustee

Your case will either be dismissed with or without prejudice depending on the reason. If it is dismissed without prejudice because of an honest mistake, you can reapply immediately. If it is dismissed with prejudice because you attempted to cheat the system, however, you must wait six months before reapplying, and some debts may be prohibited from getting discharged.

How does Chapter 7 bankruptcy affect my credit history?

Chapter 7 bankruptcy will remain on your credit report for ten years and can cause your credit score to fall by 200 points or more. As a result, you will struggle to get accepted for any form of credit immediately or for several years after. Even when you do get access to credit, your interest rates are likely to be significantly higher than normal, and lines of credit will be smaller.

The good news is that the impact of Chapter 7 bankruptcy on your credit score is diminished with each passing year. And, what’s more, declaring bankruptcy may be much better for your financial future than trying to struggle with the burden of debt.

Should I File For Bankruptcy?

It’s a decision that can change your life. Declaring bankruptcy and opting for a fresh start can lift the weight from your shoulders, but it comes with a price. On the other hand, you can soldier on trying to pay off your debt but risk falling further and further behind with payments. Family members will have opinions on your financial situation and so will friends. But ultimately the only decision that matters is your own.

If you are deciding whether bankruptcy is right for you, we are here to help. This guide and the rest of the content on our website will provide you with everything you need to know about bankruptcy, how it works and what to expect. The choice is still yours, but this guide can help you make as informed a decision as possible.

Understanding bankruptcy

The first step in filing for bankruptcy is understanding how the system works. Under the Bankruptcy Code, individuals have two choices—Chapter 7 and Chapter 13. Which one you choose will depend on your financial situation, any assets you wish to keep, and whether you want your debts to be resolved quickly or over several years. We have dedicated guides to both Chapter 7 bankruptcy and Chapter 13 bankruptcy, but you can find an overview of each below.

Chapter 7

Chapter 7 is a straight or liquidation bankruptcy that will wipe out your debts over a three to six month period. All of your assets (your house, your car, your company, etc.) are liquidated and the cash raised is distributed to your creditors to pay off as much of your debt as possible. Chapter 7 isn’t available to everyone, however. To be eligible for Chapter 7 you must have income less than or equal to your state’s median income, or pass the Chapter 7 means test.

Chapter 13

Chapter 13 is a reorganization bankruptcy that resolves your debts over several years. You are allowed to keep your assets on the condition that you pay creditors an amount that is at least equal to the value of your assets over a period of three to five years. This may seem challenging, but anything not paid off is automatically discharged. Chapter 13 bankruptcy is much easier to qualify for, too. You’ll need to prove that you can meet a repayment plan, obviously, and your debts can’t extend into the millions of dollars. Apart from that, you should be eligible.

Reasons to file for bankruptcy

There are many reasons to file bankruptcy and some are better than others. Wanting to avoid paying your student loan is not a good reason, for instance, but all of the following are:

  • Your wages are being garnished. Filing for bankruptcy can stop wage garnishment and can even get back some of the money you have paid.
  • You have unpaid medical bills. Bankruptcy can give you time to repay medical bills not covered by insurance or discharge them completely.
  • You own no or few assets. You can only file for Chapter 13 bankruptcy if your assets don’t cover your debts. If so, you may be able to file for bankruptcy and keep them.
  • You have been sued. Filing for bankruptcy can stop plaintiffs from obtaining judgments against you.
  • You have cut back, worked multiple jobs and still can’t cope. If your debt is still mounting despite doing your best to pay it off, bankruptcy can stop debt from escalating out of control.
  • Your home is in danger of foreclosure. A bankruptcy’s automatic stay can stop or delay the foreclosure process.
  • You are using retirement savings to pay off bills. Your 401K and other retirement savings can’t be touched by bankruptcy so you should declare immediately.

To be clear, not every kind of debt can or should be solved with bankruptcy. As we will discover later, some debts like child support don’t qualify for bankruptcy. It also isn’t worth declaring bankruptcy to clear small amounts of unsecured debt or if you have no assets and no income. In both circumstances, it is unlikely that they will be able to make you pay quickly, even if they sue you.

Other solutions to consider

Bankruptcy isn’t your only option if you are struggling with debt, in fact, it should be your last resort. Try some of the solutions listed below before committing to bankruptcy.

Earning more or cutting expenses

It’s nobody’s dream to take on a second or even a third job, but if doing so means you don’t have to file bankruptcy it’s a no-brainer. Similarly, you should try reducing your outgoings and sticking to a budget before deciding that you can’t pay off debts.

Negotiate with your creditors

By filing for bankruptcy, there’s a chance your creditors won’t get the full amount they are owed. Knowing that, they may be willing to negotiate a settlement.

Seek professional advice

If you can’t or won’t try to get a settlement yourself, a professional credit counselor may be able to help. These experts know the right things to say to creditors and can reduce interest rates even if they can’t settle. If you are planning on filing for Chapter 7 bankruptcy you will have to get credit counseling before you can file in court, so you may as well start today.

Do you and your debts qualify for bankruptcy?

One of the great myths of bankruptcy is that it wipes out all debts. It doesn’t. The debts below are called priority obligations and can’t be wiped out:

  • Student loans
  • Child support
  • Alimony
  • Court fines
  • Income tax debt

If you were thinking of declaring bankruptcy to discharge any of these debts, speak to a credit counselor or try one of the alternative solutions listed above.

How to avoid having your case dismissed

Dismissal occurs when a judge or trustee tosses out your bankruptcy case. It can happen for many reasons that we detail in our post on bankruptcy dismissal, but most occur because of incorrectly filed paperwork or because individuals try to cheat the system.

The best and easiest way to avoid your case getting dismissed is to hire a bankruptcy solicitor. Not only will they handle the paperwork on your behalf—and take liability for doing so correctly—they can also advise on the right type of bankruptcy for you and the obligations that it entails.

You may want to delay declaring bankruptcy

Even if bankruptcy is the right decision for you, now may not be the right time to declare. If any of the below scenarios sound familiar, waiting a few months can help you get the most out of your bankruptcy.

You recent income has been unusually high

When the court means tests your eligibility for Chapter 7 and Chapter 13, they do so by averaging your income over the last six months. So, while you may not be eligible for Chapter 7 right now if you recently lost your job, you may be eligible in a few months time.

You can sell assets yourself

If you are filing for Chapter 7 bankruptcy, you will probably be able to get more money for your assets by selling them yourself rather than letting the court do it. You can then use this money to pay more of the debt down or buy exempt assets.

You are expecting a large debt

The list of debts that you submit when filing for bankruptcy is final, and you won’t be able to add any more. If a new is on the horizon, you will be better off waiting until you are charged to declare bankruptcy. Don’t take this as an invitation to lease an expensive new car or incur other frivolous debts, however. If the court considers that you have acted irresponsibly, the debts may be upheld.

What assets can you keep?

The assets that you are legally allowed to keep will depend on the type of bankruptcy that you file.

In Chapter 7, several indispensable assets such as your home and car can be made exempt from the liquidation. Each state has its own laws on what value these exempt assets can hold, so consult a bankruptcy attorney for detailed information.

In Chapter 13, all assets are exempt just as long as you stick to the agreed repayment plan. To be clear, however, you must repay an amount that exceeds or is equal to the value of your assets. Failure to do so will result in asset liquidation.

Declare bankruptcy while you still have cash

Despite popular opinion, waiting until you have nothing left in the bank to file bankruptcy is not a good idea. Although you can do it yourself, many individuals choose to hire a bankruptcy attorney who will charge several thousand dollars. If this article has confirmed your suspicion that bankruptcy is the right solution for you, it may be sensible to stop paying unsecured bills in order to save money for an attorney. After all, if you declare bankruptcy soon, they won’t be able to chase you much longer.

Get a free evaluation before you file

It is important to understand all of your options when filing for bankruptcy. That means your first step should be to speak to a debt advisor to see if any other options, such as refinancing or settling your debts are suitable for you. Even if you have tried both tactics yourselves, these professionals have the tools and experience to settle. What do you have to lose?

Chapter 13 Bankruptcy FAQs: Everything you need to know

Chapter 13 may not be everyone’s first choice when it comes to bankruptcy, but that doesn’t mean it can’t be an effective way of clearing your debts. The trick is to know enough to make the most out of the opportunity that bankruptcy gives you. If you aren’t clear on the complexities of Chapter 13 bankruptcy or have a particular question about the process, you’ll find the answer in this FAQ.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy allows eligible debtors to retain all of their assets while providing them with a three to five year grace period to pay off outstanding debts. After this period, all remaining eligible debt is discharged.

Naturally, there are strict rules which govern how debt is repaid under Chapter 13. You must pay all secured and priority debt such as your mortgage and alimony payments in full. You must also make payments that are more than or equal to the total value of your assets. So if you have assets totaling $200,000, you must repay at least $200,000 worth of debt over the three to five year period. To be clear, the repayment period will be five years unless you earn under your state’s median monthly income, in which case it may be shorted to three years.

Who is eligible for Chapter 13?

More people are eligible for Chapter 13 than they are for Chapter 7. That’s because you do not have to pass a means test, but there are still rules governing who can apply. In particular, your secured debts cannot exceed $1,081,400 and your unsecured debts cannot exceed $360,475.

What is the process of Chapter 13?

Like Chapter 7 bankruptcy, you will need to file a petition with your local federal bankruptcy court that will include filing several forms and paying the necessary fee.

Once your case has been filed, you will need to suggest a repayment plan that will be assessed by your case’s trustee and your creditors, and either approved or rejected. If approved, you will begin the payment plan immediately and the money you pay in each month will be distributed between your creditors. Any unsecured debts that remain after the repayment plan has been completed are discharged.

The Chapter 13 process is considerably longer than Chapter 7, and you will have responsibilities until your repayment plan has ended.

What responsibilities do you have during Chapter 13?

Over the course of your three to five year grace period, you will have to comply with a number of requirements to remain eligible for Chapter 13, these include:

  • Sending all creditors a note of your bankruptcy
  • Paying all secured debt off during your repayment plan
  • Repaying priority debts in full
  • Making payments to your trustee every month
  • Not incurring significant new debt
  • Updating your trustee with annual tax returns and expected changes in income
  • Getting court approval for any new loan or for buying, selling, and refinancing your home

Should you not adhere to these responsibilities, you risk your case being dismissed and the stay against your debtors being lifted.

What are the fees for Chapter 13?

You must pay several fees when filing for Chapter 13 bankruptcy, including:

  • A $274 filing fee
  • A trustee’s fee which is equal to 10% of the total repayments under the plan. So if you repay $10,000, there is a trustee’s fee of $1,000
  • Attorney fees if applicable.

Do you need an attorney?

While you can petition for Chapter 13 bankruptcy yourself, it is recommended that you seek professional help from a bankruptcy attorney. Yes, a lawyer can be expensive, but they are almost always worth the money since they can ensure that your bankruptcy goes smoothly and that you pay back as little debt as possible.

What’s more, an attorney will handle all of the paperwork relating to your case and take on responsibility for correctly filing your statements. This means that they become liable for mistakes and you can seek damages from them should your case get dismissed.

Will Chapter 13 bankruptcy impact my credit score?

Yes, Chapter 13 will be listed on your credit score for seven years and cause your score to drop by around 200 points. This can make it impossible to access credit for at least a couple of years. You will then find that interest rates will be incredibly high and lines of credit very low when you eventually do get access. Obtaining a mortgage is also likely to be impossible for the duration of your repayment plan and possibly for several years after.

The good news is that the impact of bankruptcy on your credit score is diminished with time and it is possible to rebuild your credit score to a good level after the repayment period has ended.

What happens if I can’t make the monthly payments?

There may be cases such as a significant change in income or large unavoidable expenses that leave you unable to pay your monthly payments. Should this happen, your lawyer will need to file a moratorium which will be subject to approval by your trustee. In most cases, your repayment plan will be lengthened to make up for any temporary setbacks.

Things are different if you are suffering a long-term financial setback. In this case, you will need to apply for a modification and possible a hardship discharge. If the impact on your finances is so big that you qualify for Chapter 7 bankruptcy, you may even be able to convert your bankruptcy and have outstanding debts discharged. Alternatively, you can voluntarily dismiss your current bankruptcy and file a new one with better repayment terms.

How can I know if Chapter 13 is right for me?

Having read this FAQ, you should have a stronger understanding of how Chapter 13 bankruptcy works and the impact it can have both on your finances and your future. If you’re still confused, speaking to a credit counselor should be your next step. These professionals can show you the alternatives to bankruptcy and help you decide what is the right move for you. Ultimately, it is your decision. While you should be guided by expert advice, you should not be led by the opinions of friends and family. Although there is a stigma surrounding bankruptcy, it can be the fresh start that many people need.

Understanding Bankruptcy Dismissal: Why it happens and what to do

After years of dealing with debt, seeking advice from debt counselors and making the tough decision to declare bankruptcy, the last thing that you want to happen is to have your case tossed by the courts.

But that’s exactly what happens for hundreds of Americans each year when their case is dismissed. It’s not just hours of paperwork that goes down the drain, either. Debt collectors will be able to come after you as soon as your case is dismissed, and delinquencies and late fees will start to mount once more.

Don’t be one of the applicants that have their case tossed. By taking the time to read this guide to understand why bankruptcy dismissal happens, you can take the necessary steps to prevent it from happening to you.

Why does bankruptcy dismissal occur?

It is all too easy to make mistakes when filing for bankruptcy. The process is incredibly complicated with dozens of forms to fill in and hoops to jump through. Combine that with the stress of your financial situation, and it’s easy to see how your application can go awry. Mistakes aren’t the only cause for dismissal though. Misrepresenting your situation, such as pretending you have more debt than you do, can also lead to a judge tossing your case. As can all of the following reasons:

  • Failure to comply with or attend the court
  • Not completing credit counseling
  • Late or inaccurate filing
  • Fraud
  • Failure to pay the associated fees
  • Prior instances of dismissal or discharge
  • Violating court procedure
  • Lack of documentation
  • Failure to adhere to a Chapter 13 payment plan
  • Failing of means tests

Types of bankruptcy dismissal

There are three types of dismissal in total: voluntary dismissal, dismissal without prejudice and dismissal with prejudice. It is important to know the difference as the way in which your case is dismissed can have a significant impact on your ability to file again.

Voluntary dismissal

You can dismiss your case yourself if you wish. This typically happens when you find the means to pay your debts and would rather do that than go through with bankruptcy. This request isn’t always granted, however. And if you change your mind again after your case was dismissed, reapplying can be very difficult.

Dismissal without prejudice

If you commit an honest mistake on your application or some unforeseen circumstance causes your cause to be tossed, it is dismissed without prejudice. The good news is that you can file another petition immediately but doing so within a year will limit the automatic stay against debt collectors to 30 days.

Dismissal with prejudice

Trying to cheat or game the system will result in dismissal with prejudice. You will have to wait a predetermined period, typically six months, before filing again and, in some cases, debts existing at the time of your first filing may not be eligible for discharge.

What happens after a dismissal?

Bankruptcy dismissal puts you in the same situation as you were in immediately before filing, and this can be devastating for several reasons.

Firstly, all of the time, money, and effort that you spent preparing and filing your case is irretrievably lost. This includes all of the fees you paid to your lawyer and to the courts. Your financial situation will likely worsen, too. Not only will your debts remain with you and continue to grow, but an application to file for bankruptcy will remain on your credit score and can affect your rating.

Debt collectors will also be able to come after you again with the full backing of the law. That’s because the stay against creditors that you were granted when applying for bankruptcy is lifted the second your case is tossed meaning you can face foreclosure, lawsuits, and repossession.

What should you do after a dismissal?

There is a chance to get your case reinstated if it was dismissed without prejudice, but you must act quickly. At first, dismissals are rarely final, and courts typically provide a small window of time where you can continue to plead your case or put forward a motion to reconsider. By putting forward this motion, you will also need to rectify the reason for the dismissal.

When the motion to dismiss is final, you can either appeal or pay to file a new case immediately as long as your case was dismissed without prejudice. If it was dismissed with prejudice, however, you will need to wait six months before applying again.

How to avoid dismissal

If you are honest, there is no reason, apart from human error, for your case to get dismissed. As such, one of the best things you can do is to invest your remaining money into a successful bankruptcy lawyer. Not only will they file the paperwork on your behalf, but a good lawyer will also make sure that you meet all of the eligibility criteria for bankruptcy before applying and that there are no other factors that could lead your case to be dismissed.

How to Rebuild Your Credit After Bankruptcy

You’ve found the financial relief you were looking for and now you’re trying to figure out how to rebuild your credit after bankruptcy.

But since you’re well aware that bankruptcy filings linger on your credit reports for 10 years, you worry that your dinged up credit score will haunt you for years to come. Even worse, you fear there’s little to no chance of qualifying for a credit card or loan product in the near future if the need arises.

The good news is despite the lengthy reporting timelines for bankruptcies, the impact on your credit score will start to diminish far before the 10-year mark. And you’ll give your credit score an even better chance of improving sooner than later if you manage new credit responsibly as the positive information will minimize the negative impact of the negative information.

Read on to learn how to rebuild your credit after bankruptcy:

Is It Possible to Have a Bankruptcy Removed From Your Credit Report?

At this point, you may be asking yourself if there’s some miraculous way to have the bankruptcy removed from your credit report sooner than later so you’ll have decent credit. You always have the option to file disputes with the credit bureaus and hope that they rule in on your favor.

While it’s not totally impossible to get the result you’re wishing for, it’s best that you hire a credit repair company to analyze your situation and help you determine if this is the best course of action. Furthermore, they can handle the dispute process for you from start to finish and address other negative items in your credit report that appeared prior to the bankruptcy.

Is It Difficult to Qualify for Financing After a Bankruptcy?

Thanks to the growing market of subprime lenders, it’s now easier than ever to qualify for financing after bankruptcy. But just because a company says yes doesn’t necessarily mean you should bite the bait.

A better idea: devise a plan of action to improve your credit score and wait until you start to see that three-digit number rise before applying for new credit. Start by retrieving a free copy of your credit report from each of the credit bureaus – Equifax, Experian, and TransUnion – from AnnualCreditReport.com. Review all the contents and highlight or circle any inaccurate information. File disputes right away to ensure that your report is updated and your credit score is a reflection of accurate data. If you’re unsure of where to start with the dispute process, here’s a handy guide to help you out.

Also, consider getting a credit-builder loan to speed up the credit rebuilding process. A loan from Self Lender can help you start improving your credit score in just a few months without making a hefty securing deposit. You can also check with the local credit union or community bank to explore credit building loan products that may be available to you. But keep in mind that they usually require a hefty deposit that’s equivalent to the loan amount and help in a savings account while you make payments.

And if you can’t wait until you start to see improvements, shop around with multiple lenders until you identify the best rates and refinance the loan product as soon as you’re able to qualify for a better rate.

How to Qualify for a Credit Card After Bankruptcy

You have the option to choose from an unsecured or secured credit card product. The latter may be easier to qualify for but requires a deposit that’s equivalent to the credit limit to protect the interests of the creditor. But if your credit score is high enough to qualify for an unsecured credit card, it may be a better fit if the fees are lower.

Wondering how you’ll qualify with a fresh bankruptcy on your credit report? Select lenders offer credit card products that are geared towards consumers with credit woes, including bankruptcies, foreclosures, and charge-offs. Even better, most lenders have a pre-qualification tool on their website that allows you to see if you qualify for a credit card by entering a few details about yourself. And there’s no impact to your credit score.

To derive the greatest benefit from obtaining a credit card after bankruptcy, be sure to make timely payments as they account for 35 percent of your credit score and can quickly help you re-establish positive payment history. Also, try to keep the balance at or below 30 percent of the credit limit. Finally, confirm that the credit card issuer reports payment activity to the credit bureaus.

How to Qualify for an Auto Loan After Bankruptcy

Securing an auto loan after bankruptcy can be a bit more challenging than qualifying for a credit card. But it’s not impossible, and there are a few key actions you can take to restore the prospective lender’s trust in you and make you a viable candidate:

  • Make a hefty down payment. Doing so lowers the loan amount so you can borrow less, which poses a lower risk to the lender.
  • Establish positive payment history before applying. Make timely payments on all your existing debts for at least six months post-bankruptcy to show the lender that you’ve turned a new leaf.
  • Get a co-signer. As long as they good credit and a steady source of income, the lender may be more willing to approve you for a loan since the co-signer is responsible for making loan payments if you default.
  • Consider loan options from local financial institutions. The dealer will beg and plead with you to finance in-house, but you may be able to score a better deal with your local bank or credit union.

Because of the recent bankruptcy filing, you should expect a higher interest rate than normal. However, you have the option to refinance for a more competitive rate, which should lower your payment substantially, when your credit score improves.

How to Qualify for a Mortgage After Bankruptcy

In most instances, you’ll need to wait for at least two years following a bankruptcy to qualify for a mortgage loan. And depending on the lender and type of loan you’re seeking, it may be an even longer waiting period.

But once that two-year period has lapsed, your best bet for qualifying for a mortgage after bankruptcy is a Federal Housing Administration (FHA) Loan. You can qualify with a credit score as low as 500 with a 10 percent down payment, but a credit score of 580 gives you the ability to pay as little as 3.5 percent down.

USDA and VA loans are also viable government-backed loan options with less stringent credit criteria for consumers looking to buy in rural areas or who are current or retired service members, respectively.

You may qualify for a conventional loan if your credit score has reached 620. But as mentioned earlier, there may be a longer waiting period of up to four years. So you could always take the FHA, USDA, or VA loan now and refinance later.

How to Avoid Bankruptcy in the Future

Do you recall what caused your bankruptcy in the first place? If so, you’ll definitely want to take the proper measures to prevent history from repeating itself. The cause may have been out of your control, despite your diligent efforts to stay afloat and keep your financial house in order to the best of your abilities.

But if it was the result of compulsive overspending and excessive debt, you definitely want to develop a realistic spending plan and stick to it. That way, you’ll be telling your money where to go and not the other way around. Furthermore, you’ll have a concrete roadmap to help you achieve your financial goals.

And if you decide to apply for a credit card or loan product, only borrow what you can afford to pay back. This ensures you’ll be able to make timely payments and rebuild your reputation with creditors. Otherwise, the balances will start to pile up and you’ll do even more damage to your credit score with late payments and a sky-high debt utilization ratio.

You should also establish and start contributing to a cushion so you won’t have to resort to credit cards or loan products at the first sign of financial trouble. Having a cushion will also give you peace of mind knowing that you have something to fall back on.

Most importantly, you should consider seeing a professional therapist if your financial woes that led to bankruptcy resulted from an underlying emotional or mental health issue. The last thing you need to do is get overwhelmed and result in excessive retail therapy to cope, which will only land you right back in the hot seat with your creditors.

The Bottom Line

It’s possible to rebuild your credit after bankruptcy so you can secure credit cards and loan products. But it’s important to remember when starting from scratch to responsibly manage your debt obligations so you won’t find yourself right back in the same position.