Overwhelmed by debts with no way to pay them off? Bankruptcy could be an option. Bankruptcy is the legal process an individual goes through to have his/her debts forgiven.
There are two different types of bankruptcy petitions an individual may file:
Chapter 7 Bankruptcy – a federal judge will order the liquidation of any assets that aren’t exempt (exempt assets could be a car, household furniture or job-related tools). Proceeds from the sale of those assets will be used to help pay down one’s outstanding debts. The balance will be discharged in bankruptcy.
Chapter 13 Bankruptcy – is also called a wage earners bankruptcy as income is needed to repay a court determined portion of one’s outstanding debts. Repayment plans are structured to last between three and five years.
Not all debts can be forgiven by filing for bankruptcy protection. Examples of debts that won’t be forgiven are child support, alimony and taxes. There may be circumstances under which student loan debt could be forgiven. If considering bankruptcy, it is wise to seek the advice of a bankruptcy attorney who can guide you through the process.
What Role do Credit Counseling Agencies Play?
Filing for bankruptcy protection is a decision that should not be made without much consideration. It is invasive…every aspect of one’s financial life needs to be revealed…debts, income, assets, etc. A bankruptcy filing will hurt one’s credit score, with a filing remaining on the report for 10 years with a Chapter 7 and seven years with a Chapter 13.
There are other options to filing for bankruptcy that individuals should explore. All this starts by speaking with a certified credit counselor at an FCAA member agency.
There are many credit counseling agencies approved by the Executive Office of the US Trustee (EOUST, a division of the Department of Justice) to offer the pre-bankruptcy filing credit counseling and the post filing debtor education courses (more about those in the following paragraphs). While a credit counseling agency can’t give legal advice, a certified credit counselor can and will review the consumer’s income and expenses and help create a workable budget. They will also explain various alternative options to bankruptcy (self-help, debt management or debt settlement).
Before filing for bankruptcy protection, a consumer must complete an approved pre-bankruptcy credit counseling course. Mandated by the 2005 Bankruptcy Abuse Protection and Consumer Protection Act, this credit counseling course must be taken 180 days before filing for bankruptcy. The course must be administered by an EOUST approved credit counseling agency. A certificate of completion will be granted once the course has been completed and must be submitted with one’s bankruptcy petition.
After filing for bankruptcy but before receiving one’s discharge (a discharge is a bankruptcy court order that releases the individual from his/her legal obligations to repay their debts), the consumer must complete a post filing debtor education course. This also needs to completed through an EOUST approved credit counseling agency.
Rebounding from Bankruptcy
It is important to always be mindful of circumstances that let one to file bankruptcy, careful to avoid repeating past mistakes.
Create and follow a budget that will detail all income and all expenses. This will create a clear picture of the amount of free cash, either to put towards savings, repay newly incurred debts, or both. Consider opening a store or gas station credit card. These are usually easy to obtain and paying these bills in full will go a long way towards rebuilding your credit. If credit card bills can’t be repaid in full, make sure monthly payments (at a minimum) are made on time, every time, and perhaps for a little more than the minimum amount. This also shows future lenders that you can responsibly handle your debts.
It will take time and perseverance to rebuild your credit. Please contact an FCAA member agency for help.