Bankruptcy Definition: What Exactly Does It Mean
When an individual or company files for bankruptcy, he or it is making a legal declaration of an inability to repay his or its debt to creditors. Once bankruptcy is declared, a debtor is absolved of most financial obligations; however, the bankruptcy will have an adverse impact on the individual’s or company’s credit history and ability to obtain credit in the future.
Types of Bankruptcy
A debtor can file for different types of bankruptcy depending on the circumstances of the debt. The following are the most commonly filed bankruptcies.
Chapter 7: Liquidation
Chapter 7 ranks number 1 for bankruptcy filings in the United States. Debtors who have qualified under the means test and have attended a required credit counseling session are eligible to file for Chapter 7. An individual that files Chapter 7 will have all of his assets sold, with the exception of certain exempt property, such as necessary clothing and household appliances. The proceeds from the liquidation will go to creditors to pay off the debt. Chapter 7 does not absolve a debtor of certain obligations, including child and spousal support or student loans. All other debts can be discharged; however, the bankruptcy is reflected on a debtors credit report for 10 years. Chapter 7 bankruptcy is best suited to debtors who dont own any real estate property.
Chapter 11: Reorganization
Chapter 13: Individual Debt Adjustment
Learn What Happens When Creditors Receive Notice Of Your Bankruptcy
By Baran Bulkat, Attorney
When you file for bankruptcy relief, the court sends notice of your case to all creditors listed on your petition. Read on to learn more about what happens when creditors receive notice of your bankruptcy.
Reporting Debts As Discharged In Bankruptcy
While it might be daunting to think about a bankruptcy filing showing up on your for ten years, it might not be as bad as you think. A bankruptcy discharge can help you clean up debt much faster than you’d be able to do yourself.
For instance, instead of a delinquent or unpaid debt lingering on your report for years, it will show as being discharged as part of your bankruptcy. In fact, creditors won’t be able to report your debt in a variety of ways that could cause your credit to suffer, such as allowing the obligation to show as:
- currently owed or active
- having a balance due, or
- converted to a new type of debt .
Such reporting labels are often the reason creditors deny applicants credit. In some cases, applicants must pay off such debt as a condition of loan approval. Instead, when you pull your report, each qualifying debt should be reported as:
- having a zero balance, and
- discharged, “included in bankruptcy,” or similar language.
Unfortunately, some creditors don’t update information to the credit reporting agencies. This tactic could be a way to get you to pay up, even though you no longer legally owe the debt. If your credit report shows an improperly labeled discharged debt, you’ll want to take steps to correct the problem.
Correcting Misreported Discharged Debt
Disputing errors is relatively straightforward. You’ll do so by using the online procedure provided by each of the three major credit reporting agencies.
A creditor who repeatedly refuses to report your discharged debt properly might be in violation of the bankruptcy discharge injunction prohibiting creditors from trying to collect on discharged debts. If you take steps to remedy the misreporting, and the creditor refuses to fix the error, talk to a bankruptcy attorney.
Where To Get Further Advice And Information
If you are looking for further advice on bankruptcy and how it may affect your credit score, make sure to read the Governments official bankruptcy section. There are also organisations called StepChange and The National Debtline that have useful online resources as well as Freephone numbers and online chat functions to get advice directly.
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Whats The Best Way To Keep Them
The fate of credit card rewards when the holder goes into bankruptcy is unclear. Theres a chance you may be able to keep them, and theres also a chance your card could be frozen and your earned points and rewards cancelled. Your best bet?
Use them up. Spend them, says Haupt.
Thats right: This is a case of use it or lose it. As long as youve come by your points in good faith, youre certainly allowed to spend them and that might be the best way to ensure youll be able to use them. You cant incur debt with the intent of not paying, thats fraud, says Haupt. And you cant lie. But if you have an asset and spend it legitimately, thats appropriate.
Keep in mind, though, that if youre behind on your payments, you may already have lost access to your rewards unless you pay what you owe.
But if youre in the clear, and have enough points to cash in on a ticket or hotel stay, do it before you file for bankruptcy. Its the only surefire way to be sure that you wont lose them.
How Long Bankruptcy Lasts For
Bankruptcy normally lasts for one year. After this time, you’ll be ‘discharged’ from your bankruptcy regardless of how much you still owe.
Your discharge could happen earlier if you co-operate fully with the Official Receiver. In some cases and if you’ve behaved irresponsibly , bankruptcy can last for more than one year.
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Alternatives To Chapter 7
Debtors should be aware that there are several alternatives to chapter 7 relief. For example, debtors who are engaged in business, including corporations, partnerships, and sole proprietorships, may prefer to remain in business and avoid liquidation. Such debtors should consider filing a petition under chapter 11 of the Bankruptcy Code. Under chapter 11, the debtor may seek an adjustment of debts, either by reducing the debt or by extending the time for repayment, or may seek a more comprehensive reorganization. Sole proprietorships may also be eligible for relief under chapter 13 of the Bankruptcy Code.
In addition, individual debtors who have regular income may seek an adjustment of debts under chapter 13 of the Bankruptcy Code. A particular advantage of chapter 13 is that it provides individual debtors with an opportunity to save their homes from foreclosure by allowing them to “catch up” past due payments through a payment plan. Moreover, the court may dismiss a chapter 7 case filed by an individual whose debts are primarily consumer rather than business debts if the court finds that the granting of relief would be an abuse of chapter 7. 11 U.S.C. §;707.
Debtors should also be aware that out-of-court agreements with creditors or debt counseling services may provide an alternative to a bankruptcy filing.
How Resolve Can Help
If youre dealing with debt and not sure what to do, were here to help. Become a Resolve member and well contact your creditors to get you the best offers for your financial situation. Our debt experts will answer your questions and guide you along the way. And our platform offers powerful budgeting tools, credit score insights and more. Join today.
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Does Filing Bankruptcy Mean I Lose Credit Forever
No, this is a popularmisconception. It only means your credit will be impaired and there will be a note that you filed bankruptcy on your credit report for a period of up to ten years. However, you can take measures to repair your credit over time, such as obtaining secured credit cards. Park & Nguyen can provide this information to you.
Schedule your free phone consultation by calling us at 710-4111. We are committed to offering thorough representation you can rely on to help you turn over a new leaf.
What About Hotel And Airline Rewards
Your best shot for keeping your rewards is if your credit card is with a hotel or airline. Since the credit card issuer isnt the only one involved in the rewards program, you may still be able to hang onto those points if you transfer them to the hotel or airline loyalty program. If this is the case, try to transfer these points before you file for bankruptcy, and be sure to check with the relevant airline or hotel if you have questions.
If youre worried about losing access to credit, just keep in mind that its not forever. Youll get swamped with credit card offers after you file for bankruptcy, says bankruptcy attorney Robert Haupt. Bankruptcy is a clean slate it improves your ability to pay your bills, and thats attractive to credit card companies. With careful spending and time, youll qualify for rewards credit cards again soon.
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Other Required Bankruptcy Forms
You’ll need to file many other forms in the bankruptcy case. Although most are filed with the petition, you can file them up to 14 days afterward. They detail the debtor’s income, assets, debts, expenses, and other aspects of the debtor’s financial circumstances.
What Should I Look For
Remember that when you file bankruptcy, you must list all of your debts.
This means that every open credit account in existence at the time of filing should be marked as either included in bankruptcy, or as discharged in bankruptcy.
- Any account that you paid off prior to the bankruptcy should be listed as paid and closed
Without the bankruptcy, all of the delinquent and collections accounts would report to the bureaus every month that you had missed a payment.
This lowers your credit score every month.
What Is Chapter 7 Bankruptcy
Chapter 7 bankruptcy â also known as liquidation or straight bankruptcy â is a process in which you are able to ask a bankruptcy court to wipe out most of your debts so you can start over. A judge will review your case and accept or deny the request.
If approved, the court puts an “automatic temporary stay” in place that stops creditors from trying to collect payments or taking action such as wage garnishment, repossession, or foreclosure, while the bankruptcy case is pending.
Chapter 7 bankruptcy provides immediate relief to people in serious debt; however, there are some drawbacks as well.
Filing for bankruptcy protection negatively affects your credit score for many years, and you could lose certain nonexempt assets that are sold, or “liquidated,” to repay your creditors. Most assets, though, are considered exempt and are not subject to liquidation.
The liquidation process generally involves three steps:
Keep in mind your student loans, tax debt, and other types of secured debt are not “dischargeable,” and you will still need to repay these unless you are able to show extraordinary circumstances. Most consumer debt, though, like medical bills and credit card debt, are dischargeable.
How Long Does A Bankruptcy Stay On My Credit Report
There are differences in severity between a Chapter 7 and a Chapter 13 bankruptcy. According to the Fair Credit Reporting Act , a Chapter 7 bankruptcy can remain on your credit history for up to 10 years from the filing date and a Chapter 13 bankruptcy can remain for a maximum of 7 years.
The FCRA states only the legal maximum amount of time bankruptcies can appear on your report and not the minimum. This means a bankruptcy can be removed earlier than the legal maximum, but it must be proven that it is misreported, unsubstantiated or otherwise found inaccurate. A bankruptcy cannot be removed simply because you do not want it there.
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Considering Bankruptcy FAQs
Do I need to meet with an attorney before I can speak to a coach at credit.org?
You do not! You can speak to a financial coach at credit.org before or after you meet with an attorney.
How long will I have to wait for a coaching appointment at credit.org?
We have certified bankruptcy coaches standing by, ready to take your call and answer any questions you may have. No appointment is necessary. Simply call us at 1-888-425-3453 to speak directly to a financial coach at your convenience.
How long will the coaching session take?
In accordance with the bankruptcy law, The Executive Office for United States Trustees requires that you participate in a counseling session that may take up to 90 minutes or longer. Sessions may be slightly longer or shorter depending on your situation, the amount of information to be gathered, and the number of questions you may have. We will spend all the time needed to answer your questions and make sure you have a complete understanding of your options.
How much does credit.org charge for their services?
Your credit report score is not impacted by obtaining counseling through our agency.
Combination discounts are also available. If you purchase the Pre-filing Credit Counseling from us and return to our agency for your Pre-discharge Debtor Education, you will receive a discount on the Debtor Education course. Click here to see our Fee Wavier Policy and combo prices.
How Long Do Bankruptcies Stay On Your Credit Report
The length of time that a bankruptcy filing stays on your credit report depends on what type of bankruptcy you filed. We took a look at Chapter 7 and Chapter 13, which are the two main types of consumer bankruptcies, and to see how their impacts on your credit score differ.
- Chapter 7 bankruptcy: Also known as liquidation bankruptcy, Chapter 7 is what Harrison refers to as “straight bankruptcy.” It’s the most common form of consumer bankruptcy and is usually completed within three to six months. Those who file for Chapter 7 will no longer be required to pay back any unsecured debt , like personal loans, credit cards and medical expenses, but they may have to sell some of their assets to settle secured loans. Chapter 7 bankruptcies stay on consumers’ credit reports for 10 years from their filing date.
- Chapter 13 bankruptcy: Harrison refers to Chapter 13 as the “wage earner’s bankruptcy.” This form of filing offers a payment plan for those who have the income to repay their debts, just not necessarily on time. About a third of bankruptcies filed are Chapter 13 . Those who file are still required to pay back their debts, but instead over a three-to-five year time frame. Chapter 13 bankruptcies stay on consumers’ credit reports for seven years from their filing date.
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Would I Lose My House If I Claim Chapter 7 Bankruptcy
It depends on how much equity you have in your house. Equity is the money you will net or receive after all necessary expenses on the house is paid for at closing. i.e. promissory note, transfer tax, a real-estate broker, etc.
Example: House sells for $100,000.00, closing cost was $10,000.00. $90,000.00 is the equity of your house. Anyone who files a Chapter 7 orChapter 13 can claim up to $170,825.00 of equity exemption. This exemption is called the homestead exemption. To qualify for this exemption, the person must reside or live in that particular home continuously for more than 2 years.
If the husband and wife are filing Chapter 7 bankruptcy jointly, each one can claim the $170,825.00 homestead exemption. In other words, filing a joint chapter 7 petition, the couple may claim a $341,650.00 homestead exemption.
As noted before, once you claim the homestead exemption, you may not also claim any cash exemption.
Get on the road to a fresh new start. Call 710-4111 to schedule a free appointment today.Our services are available in Spanish!
What Are Secured Debts And Can They Be Discharged
A secured debt is a debt that is collateralized by a tangible object such as a car or mortgage on a house. These debts cannot be discharged because the court’s position is that it would create a windfall for the debtor if that debtor were allowed in bankruptcy to get a discharge and be able to keep those items.
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Chapter 7 Filing Fees And Administrative Fees
When you file for Chapter 7 bankruptcy, the courts will charge you:
- One;case filing fee;of $220
- One miscellaneous administrative fee of $39
- One trustee surcharge of $15
Typically, the total fee of $274 is paid to the clerk of the court when you file your paperwork. If you cannot pay this amount right away, you must:
- Ask the court’s permission to delay paying
- Pay in four installments of $68.50
- Complete all payments within 120 days after filing for bankruptcy
- Ask the court for extra time which will extend your time to 180 days after filing for bankruptcy.
If you and your spouse chose to file together, you only owe one set of these fees. If you don’t pay these fees your case can be dismissed.
The court may waive the requirement that the fees be paid if:
- Your combined income is less than 150% of the poverty level
- You can’t afford the fees even with an extension or four payments