Is Personal Bankruptcy 100% Forgiveness? Not exactly…

Let me be clear up front, bankruptcy should literally be the LAST resort. However, when it comes to debt management and the debt crisis that exists in America, this is a real conversation many families are having.

Before you consider bankruptcy, make sure you have looked into the debt solutions in the market that may help your situation, such as debt consolidation, refinancing, and consult with the National Foundation for Credit Counseling.

If this conversation is real for you or someone you know, get a bankruptcy attorney and be aware that there are 2 types of bankruptcies an individual can file: Chapter 7 and Chapter 13.

Chapter 7

This bankruptcy is known as the liquidation bankruptcy. If a court grants you chapter 7 bankruptcy, your unsecured debts will be forgiven within a few months of the order. As for the secured debts, such as a home and car, you will most likely have to liquidate them so that the cash can be used to make payments to the creditors you owe.

Not anyone can just apply for this bankruptcy. There is an income eligibility test and you must earn less than the state’s median income on a monthly basis or submit a means test that examines your financial records.

I’ve kept things simple and high level. Here are more details about Chapter 7 bankruptcy from uscourts.gov.

Chapter 13

The nickname for this law is the wage earner’s plan. Essentially, if a judge rules in your favor you will have a repayment plan for all or parts of your debts. You would have to provide a payment proposal to the court and to your creditors with terms of 3 to 5 years. Additional terms of this agreement will be based on a review of your finances and how you compare to the median income in your state. Chapter 13 has advantages because you could potentially keep your secured debts, such as home and cars. However, payments must still be made and those payment terms might be adjusted as well.

What’s interesting is that co-signers might be able to get off the hook if you are granted chapter 13 bankruptcy. When it comes down to payments, a trustee would be named to collect your monthly payments and that person would disperse the cash to the creditors you owe. Therefore, you don’t directly deal with the creditors.

Just like for Chapter 7, I kept it simple and high level. Here are more details about Chapter 13 bankruptcy from uscourts.gov

Life after bankruptcy

First and foremost, your credit will be shot and bankruptcy will remain on your credit history for 10 years. Rebuilding your credit will be extremely difficult. If you’re on chapter 7 bankruptcy, your assets would have been liquidated and you’re most likely starting from scratch…so the first thing you’d want to do is find a job ASAP, live a frugal life style, and build your emergency fund!

To rebuild your credit, you can start with a secured credit card. It requires you to deposit cash as collateral for the account. For example, you deposit $500 and the bank holds on to that cash to secure the $500 line of credit that they will give you. After 6 to 12 months of perfect management of the credit card, contact your bank and ask them to transition it to a non-secured credit card and to return your $500 deposit. This will help boost your credit and improve your relationship with creditors.

Become an authorized user! Find a family member, a partner/spouse, or a friend who is responsible with their credit and who is willing to help you with this strategy. Ask them if you can be added as an authorized user on their credit card. You want to make sure that they maintain low balances on the account, the account is always paid on time, and that they have long history with that account. These factors will definitely help your credit once it is reported to your credit report.

Bankruptcy is no easy situation and many Americans have to endure this painful process. However, I’ve met many business men and women who have lived through bankruptcy. They’ve shared with me that those were the toughest years of their lives and their confidence was shattered. But, they persevered and remained persistent about building their lives again. So life after bankruptcy will require a fresh mindset and determination!

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