A bankruptcy is not necessarily a death knell for your finances. In fact, it could represent a second chance to get your financial house in order and start making positive steps to increase the odds that you can improve your financial literacy as well as secure a financially independent future for yourself and your family. For those who are considering filing for bankruptcy, what should they know to ensure that it is successful?
Part I-Finding the Right Attorney
The most important thing that you can do for yourself when trying to overcome money issues is to find someone who can help you take stock of what can be done to overcome those issues. Finding the right bankruptcy attorney can make it easier to understand what type of bankruptcy is best for you, easier to negotiate with creditors in an effort to have as much debt as possible forgiven and ensure that your rights are being preserved during the entire process.
How to Find a Good Bankruptcy Attorney
How do you find the best bankruptcy attorney in your case? The easiest way to find a good attorney is to start your search online. This will expose you to attorneys in your area who you may not have otherwise been familiar with. Many times, attorneys who advertise the most on television or on radio work for large firms with a lot of resources.
While this could be helpful for your situation, opting for an attorney just because you heard an ad on television or saw an ad online could limit your search to your detriment. If you want someone who is going to answer your calls at all hours or be there for you whenever you need help, you may want to go with a smaller firm that may not have as many clients at one given time.
Working with a smaller firm may be helpful if you want to increase the odds that your attorney is going to handle your case personally. While attorneys from larger firms may spend a lot of time on your case, they may also hand the case off to junior associates or other researchers who may not be as familiar with the case or have as strong a relationship with the person who brings the case to the firm.
Interview as Many Attorneys as You Wish
Before selecting your attorney, make sure that you build a good rapport with the person who you choose to represent you. As the results of a bankruptcy case can have a large impact on your finances, you need someone who treats your bankruptcy as a top priority just like you do.
This means that you need to interview multiple attorneys until you find the person who you feel comfortable with. The good news is that most lawyers will allow for a free consultation to discuss your case. This enables you to shop around a little bit without spending any more money that you may not have available to spend.
How an Attorney Helps You Right Away
An attorney can help you right away in a couple of different ways when he or she accepts your case. First, your creditors will be required to talk to your attorney about any debt that you may have instead of contacting you directly. Second, your attorney should start the process of filing your bankruptcy petition and asking for a stay of your debt.
The stay of debt means that creditors cannot take any legal action against you such as a foreclosure proceeding. If your creditors are planning on suing to recover a credit card or medical debt, they will not be able to proceed once you or your attorney has formally asked for bankruptcy protection. Therefore, while you can take your time selecting an attorney, it may be in your best interest to do so in a timely manner.
Part II-Setting A Budget During Bankruptcy
Regardless of what type of bankruptcy that you file for, the effort will be for naught if you are unable to make and stick to a budget. While some bankruptcies are the result of unexpected medical bills or a job loss, many bankruptcies are due to mismanaging of funds or a lack of basic financial literacy. If necessary, your attorney may be able to suggest credit counseling or other money managing classes that may help you get control over your finances.
How to Set a Budget Before and During the Bankruptcy Process
Before you file for bankruptcy, you will be asked to submit a list of your current debts, current assets and anything else that may be able to help you pay off your debt. Depending on the amount of cash or other assets that you have on hand prior to filing for bankruptcy, you can develop a rough budget that you can stick to during the bankruptcy process.
During the bankruptcy process, your creditors may have the opportunity to ask questions about your finances and your ability to repay some or all of your debt. Therefore, it may be in your best interest to abstain from spending $100 a week on lobster while claiming to not have any money to repay your car loan or mortgage.
In addition, a bankruptcy judge may require you to attend credit counseling classes prior to having a bankruptcy approved. Therefore, it may be worthwhile to create a budget that accounts for your basic needs such as food, shelter and transportation to and from work.
Setting a Budget After the Bankruptcy Is Discharged
Depending on the results of the bankruptcy case, you may have less money or assets to liquidate or use as collateral for a loan. Additionally, your credit score is likely to be reduced by 100 points or more. This means that you may have to downsize from the lifestyle that you were used to prior to the bankruptcy.
Some good tips for those who have just gotten out of bankruptcy is to focus on making payments to creditors if you opt for Chapter 13 bankruptcy and putting as much money as possible in the bank. This may require you to buy a used car, rent an apartment instead of living in a home and abstain from credit card debt as much as possible except to reestablish your credit score and history.
Don’t Hesitate to Ask for Help
If you feel as if you are slipping back into old habits, do not be afraid to ask for help or join a support group to hold you accountable for your actions. It may be possible to have part of your paycheck each pay period deposited into an account that only a trusted friend or a spouse has access to. That forces you to save and have access only to that money if a true emergency comes along.
As financial problems may be tied to psychological issues, overspending could be something that can partially be solved with therapy and long-term financial counseling until those issues are fixed. It is critical that these issues are identified and solved after a bankruptcy because it may not be possible to file for bankruptcy again for several years after the first bankruptcy is discharged.
Part III-Choosing the Right Type of Bankruptcy
There are two types of bankruptcy that you may be able to file for when asking for debt relief. The first main type of bankruptcy is Chapter 7 bankruptcy, which is a liquidation of assets and an almost immediate discharge of most unsecured types of debt. Chapter 13 bankruptcy is a reorganization of secured or unsecured debts, which sees a person repay part or all of the debt over a period of no more than five years.
What is Chapter 7 Bankruptcy?
Chapter 7 bankruptcy allows an individual to walk away from a debt without having to make any more payments on it. However, those who file for Chapter 7 bankruptcy may have to pay for or surrender some valuable assets. While a house may be protected from foreclosure or a retirement account may not be eligible for liquidation, there is a chance that you could lose a second car with equity, jewelry (not your wedding rings) or anything else that could be used to raise money to pay off creditors.
Passing the Means Test
To be considered eligible for Chapter 7 bankruptcy, an individual needs to be able to pass a means test. This test validates that a debtor would suffer from an unfair financial hardship if forced to pay some or all of the debt. For example, if someone had an inherited IRA worth $100,000 and only had $50,000 in debt, that person may be required to liquidate the inherited IRA to pay off the debt or ask about Chapter 13 bankruptcy instead.
Have You Filed for Bankruptcy in the Recent Past?
Those who have filed for bankruptcy in the recent past may not be eligible for Chapter 7 bankruptcy for several years even if they could pass the means test. However, if an individual does not have the money or assets to repay a debt, creditors may still have to write off most of the debt as a practical matter. Your lawyer may be able to assist you by helping to come up with a debt relief plan if Chapter 7 nor Chapter 13 bankruptcy are viable alternatives.
Don’t Forget the Impact on Your Credit Report
Chapter 7 bankruptcy will stay on your credit report for 10 years after the date that the debt is discharged. This is important to know because the date in which the debt is considered discharged is the date when the case is settled, which is typically three months after filing.
What’s Chapter 13 Bankruptcy?
Chapter 13 bankruptcy enables an individual to pay their past due debt over time to satisfy the demands of his or her creditors. When the conditions of the bankruptcy have been met, the debt will be considered discharged and the creditors may mark the debt as paid in full or paid as agreed.
Chapter 13 Bankruptcy May Have Fewer Harsh Consequences
While all bankruptcies will show up on your credit report, the impact to a person’s credit score may not be as pronounced. This is because an effort is being made to pay back as much of the debt as possible. It will also only show up on a credit report for ten years just like any other item on your credit report. Depending on the circumstances of a person’s credit prior to the bankruptcy, there may or may not be a huge drop to that person’s credit score.
It May be Used as a Tool to Delay Foreclosure or Other Legal Action
Bankruptcy may be used as a tool to avoid or delay foreclosure proceedings against someone who is behind on his or her mortgage. Although there is no guarantee that a loan modification can be agreed to, an individual may have two or three months while the case is working its way through the legal system to work out a deal with a lender that is more favorable to the borrower than a foreclosure.
Filing for bankruptcy is something that should not be done without careful consideration. You will need to find a good attorney, learn how to and develop a budget and determine which type of bankruptcy that you are eligible to apply for. While there is no one right plan for those going through the bankruptcy process, taking it seriously may be able to put a person on the right track to financial success in the future.