As much as you may try, sometimes you cannot get a hold of your finances.
It happens. If you feel overwhelmed and credit counseling programs haven’t helped, you might be forced to declare bankruptcy. Declaring bankruptcy is a big step, so make sure you know how it all works before you decide.
We’ve answered a few typical questions about bankruptcy below.
What is Bankruptcy?
Bankruptcy is when you legally declare yourself unable to pay back all your debtors.
Individuals and businesses can declare bankruptcies, but the outcomes are different. If you declare bankruptcy, it doesn’t always mean your financial slate is wiped clean. You may still have to make payments toward your debt.
What Kinds of Bankruptcy Are There?
- Chapter 7: Also known as personal bankruptcy, Chapter 7 helps individuals and businesses with debt management problems by completely eliminating unsecured debts. This process not only alleviates the need to pay back those bills, but also prevents collection agencies from contacting you regarding those debts. In other words, your slate is wiped clean. There are some debts that are not included in a Chapter 7 filing, including federal student loans and IRS payments. If you file Chapter 7, you can’t again for six years.
- Chapter 13: Chapter 13 is becoming the most common way to take care of debt management problems when there is no other solution. Unlike Chapter 7, Chapter 13 doesn’t wipe the slate clean. Instead, the courts work with you to set up a fixed monthly payment plan so that you can resolve all of your debts within a 3 to 5 year span. Taking this route helps you to keep the items you currently owe money on, rather than turning them over to the courts for liquidation.
There are also different versions of bankruptcy for businesses, but we’re focusing on personal bankruptcy here.
Are My Retirement Funds Affected by Declaring Bankruptcy?
Rest assured, your 401k is not affected by bankruptcy. While creditors can access your other assets to liquidate so that they can cover their loss – The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 – which was effective on October 17, 2005 – prevents them from accessing your 401k investments.
What Happens After I File Bankruptcy?
- Automatic stay. The first step that occurs after filing a bankruptcy is the automatic stay. This is a notice that alerts debt collectors that they are no longer allowed to communicate with you regarding what you owe them.
- Meeting with creditors. About a month later, the bankruptcy proceedings continue with a meeting with the creditors. During this meeting, you will discuss the filing and confirm that all eligible debts have been included and are valid. The trustee will attend the meeting and look for any discrepancies and inaccuracies that you’ve listed in your total debts owed.
- Property handed over for liquidation. In the meeting, if you have property that you have not listed as exempt, it will be given to the trustee to sell off as a way to pay your creditors. At this time, you will likely be informed that you are not allowed to give away, throw away, or sell any of your property without the court’s prior consent. There are some items you won’t have to hand over to the government, however.
- Obtaining a discharge. After filing a bankruptcy it usually takes somewhere between four and six months to receive the actual notification that you have been relieved of your the debts claimed during the bankruptcy proceedings. Until you receive your discharge, you can ask that the entire process be dismissed.
Bankruptcy can be full of legal jargon and confusing processes. Make sure you know what you’re getting into before you decide to declare bankruptcy, so you won’t make the same financial mistakes again.