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What Is Bankruptcy? Definition, Types and What You Need to Know
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What is Bankruptcy? Definition, Types and What to Know
Are you struggling with a mountain of debt but not making any progress? It could be that bankruptcy is the tool to overcome the debt.
By Sean Pyles Senior Writer | Personal finances financial debt Sean Pyles leads podcasting at NerdWallet as the producer and host of NerdWallet's "Smart Money" podcast. In "Smart Money," Sean talks with Nerds from the NerdWallet Content team to answer listeners' personal finance questions. With a focus on thoughtful and practical advice on money, Sean provides real-world guidance that will help consumers improve their financial lives. In addition to answering listeners' financial concerns on "Smart Money" Sean also interviews guests outside of NerdWallet and creates special segments to explore topics such as the racial gap in wealth as well as how to get started investing and the history for student loans.
Before Sean took over podcasting for NerdWallet the company, he also wrote about topics concerning consumer debt. His writing has been featured throughout the media including USA Today, The New York Times as well as other publications. When Sean isn't writing about personal finances, Sean can be found working in the garden, taking walks, or taking his dog for long walks. Sean is located at Ocean Shores, Washington.
Updated Apr 25 2022
Editor: Kathy Hinson Lead Assigning Editor Personal finances, credit scoring debt and money management Kathy Hinson leads the Core Personal Finance team at NerdWallet. In the past, she worked for 18 years at The Oregonian in Portland in positions such as copy desk chief and team editor and designer. Previous experience included news and copy editing for various Southern California newspapers, including the Los Angeles Times. She earned a bachelor's degree in mass communications and journalism from Iowa's University of Iowa.
A majority of the products we feature are from our partners, who we pay. This influences which products we write about as well as the place and way the product is featured on a page. However, this does not affect our opinions. Our opinions are entirely our own. Here's a list and .
The most important key
Bankruptcy is a legal tool to help consumers and businesses resolve overwhelming debt. It's a complex process best handled with the assistance of an attorney.
Chapter 7 and Chapter 13 are the two most commonly used by consumers, while Chapter 11 is typically used for business purposes.
Bankruptcy may make sense in the event that your non-mortgage total is greater than 40% of income and the method of paying it down is unclear.
The effects of bankruptcy on your credit will be severe and will remain with you for years, but you can start to rebuild your credit score as quickly as a few months.
There are alternative debt relief options to consider for example, one .
What is bankruptcy?
The process of filing bankruptcy is legal that can provide relief for people struggling to repay debts. In the event of a bankruptcy filed, people may be able to eliminate a portion of debt, or even enter the repayment program with better terms for payment.
A bankruptcy filing puts an end to the phone calls, debt litigations and . The process is complex and the hiring of an attorney is highly recommended, but you're likely to see some parts of your financial situation improve within six months of filing. It is important to note that certain debts such as student loans or recent tax payments and child support generally can't be wiped out in bankruptcy.
What are the different types of bankruptcy?
The two most common kinds of consumer bankruptcy are . Chapter 11 bankruptcy is typically used by businesses.
Here's the full overview:
Chapter 7 bankruptcy
Known as "liquidation" since most non-secured debts are forgiven this is the fastest and most popular type of bankruptcy.
The best option for consumers who have primarily unsecured debt, such as medical debt and credit card debt, as well as personal loans.
Eligibility
It is necessary to pass this test test that determines if you are eligible to be a Chapter 7.
Could not have received any Chapter 7 discharge or a Chapter 13 discharge in the in the past six years.
You cannot have filed a bankruptcy petition within the last 180 days, which was dismissed because you failed to appear in court or abide by court orders, or you voluntarily dismissed your own filing as creditors requested court relief to recover the property they held a lien on.
Chapter 13 bankruptcy
Known as known as a "wage earners" bankruptcy, restructures debts into a payment plan over three to five years.
Best for: Those who have assets they want to keep, such as expensive jewelry, or secured loans they'd like to stay current , such as a mortgage.
Eligibility
You should have a steady income.
You must be current with tax filings.
You have been charged for Chapter 13 within the last two years or Chapter 7 in the past four years.
It is not possible to file a bankruptcy petition in the previous 180 days that was dismissed for certain reasons like failure to attend court or follow the court's order.
Chapter 11 bankruptcy
It is also known as a "reorganization" bankruptcy the chapter is commonly utilized by companies and other businesses.
Ideal for businesses that wish to remain operational.
Eligibility
You cannot have filed bankruptcy in the previous 180 days and it was dismissed due to your failure to show up in court or to follow the court's orders or you decided to dismiss your own bankruptcy petition as creditors requested court relief to reclaim the property they held a lien on.
Are you a good candidate for bankruptcy?
The filing of bankruptcy isn't an easy choice You'll need to weigh the pros and cons of the long-term consequences on your credit and debt. But in general, if:
There's no way to repay your debts in five years.
Your total debt (excluding any mortgage) is more than 40percent of income.
You're paying the most you can toward your debts but aren't making progress.
The burden of debt is preventing you from meeting the other goals of your finances, like investing for retirement.
If you're considering bankruptcy take advantage of free consultations with a bankruptcy attorney and a to better understand your financial situation and determine if bankruptcy is the right choice for you.
Do you require a bankruptcy attorney?
The quick answer is: Yes.
Bankruptcy can be a lengthy and complicated process. A mistake in filling out the form could lead to the denial of your bankruptcy case. This means that you will need to wait for six months before filing again. to guide you through the process and ensure that your paperwork is properly filled out.
Beware if you're thinking of filing without an attorney: The bankruptcy data shows that only 1.4% of Chapter 13 bankruptcy cases filed without an attorney in 2012 were granted a discharge, meaning the cases were dismissed and the debts that were eligible paid off in accordance with the Federal Judicial Center.
Of Chapter 7 bankruptcy cases filed with an attorney in 2012, 95% were successfully resolved in comparison to just two-thirds of the cases that were filed without an attorney, according to the center's data.
A lot of bankruptcy attorneys will demand the payment prior to filing, but you have options to help .
How long will bankruptcy remain on your credit report?
Filing for bankruptcy is the most damaging action you can do to your credit as it can damage your credit for years to come .
However, there's one bright side: Your credit may begin to improve after a few months of filing. The improvement could be particularly noticeable if you were already delinquent in your debts.
A 2014 report from the Federal Reserve Bank of Philadelphia found that those who had filed Chapter 7 bankruptcy saw their scores rise from 538 on average and an average 600 on a scale between 300 and 850 by the time their case was discharged, which usually takes six months.
There are steps you can take to help .
Learn: Canadians?
What are alternatives to bankruptcy?
Based on the type and amount of debt you are in You may also have other solutions to settle your debt.
Make use of this calculator to research the various options available to you for debt relief, such as an approach to managing debt from a nonprofit credit counseling agency, do-it-yourself methods and consolidation.
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The author's bio: Sean Pyles is the executive producer and host of NerdWallet's Smart Money podcast. His writing has been featured in The New York Times, USA Today and elsewhere.
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