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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 You Need to Know
Are you battling an overwhelming amount of debt and not getting any results? Bankruptcy may be the tool to help you climb over the hurdle.
by Sean Pyles Senior Writer | Personal finances, debt Sean Pyles leads podcasting at NerdWallet as the host and producer of the NerdWallet's "Smart Money" podcast. The show "Smart Money" Sean talks with Nerds from the NerdWallet Content team to answer the questions of listeners about their personal finances. With a particular focus on sensible and practical advice on money, Sean provides real-world guidance that can help consumers better their financial lives. In addition to answering listeners' money questions on "Smart Money" Sean also interviews guests who are not part of NerdWallet and produces special segments to explore topics such as the racial gap in wealth, how to start investing and the history of student loans.
Before Sean lead podcasting for NerdWallet He also covered issues that dealt with 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 digging around the garden, taking walks, or taking his dog for long walks. He lives in Ocean Shores, Washington.
Updated April 25, 2022
Editor: Kathy Hinson Lead Assigning Editor Personal finances, credit scoring financial management and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. In the past, she worked for 18 years with The Oregonian in Portland in roles including copy desk chief and team editor and designer. Her previous experience includes copy editing and news for various Southern California newspapers, including the Los Angeles Times. She received a bachelor's degree in journalism and mass communications in The University of Iowa.
The majority or all of the products featured here are from our partners, who pay us. This influences which products we write about and the location and manner in which the product is featured on the page. However, this does not affect our assessments. Our opinions are entirely our own. Here's a list and .
The most important takeaways
Bankruptcy is a legal tool to aid businesses and customers deal with debts that are too overwhelming. This is a lengthy process best taken on with the assistance of an lawyer.
Chapter 7 and Chapter 13 are the two most common for consumers, while Chapter 11 is typically used for businesses.
It may be a good idea to file for bankruptcy in the event that your non-mortgage total exceeds 40% of your income and the method of paying the debt is unclear.
The effects of bankruptcy on your credit will be severe and last for years, however you can begin to restore your score in as little as several months.
There are various ways to reduce debt that you can think about for example, a .
What is bankruptcy?
Bankruptcy is a legal process which can offer relief to those who are struggling to pay back their debts. Based on the type of bankruptcy that's filed, consumers are able to wipe out a certain amount of debt, or even enter an arrangement for repayment with more favorable terms for payment.
A bankruptcy filing puts an end to the phone calls, debt litigations and debt lawsuits . The process is complex and it is recommended to hire an attorney however you're likely be able to see certain aspects of your financial situation improve within six months of filing. Note that some debts, such as student loans or recent tax payments and child support generally cannot be eliminated in bankruptcy.
What are the different types of bankruptcy?
The two most common kinds of bankruptcy for consumers are . Chapter 11 bankruptcy is typically employed by companies.
Here's a summary:
Chapter 7 bankruptcy
Known as "liquidation" due to the fact that most non-secured debts are forgiven it is the quickest and most commonly used type of bankruptcy.
Ideal for: Customers who have primarily unsecured debt, such as medical debt, credit card debt or personal loans.
Eligibility
It is necessary to pass this test , which determines whether you qualify to file Chapter 7.
It is not possible to have had a Chapter 7 discharge or a Chapter 13 discharge in the in the past six years.
Cannot have filed bankruptcy in the past 180 days and it was dismissed because you failed to show up in court or comply with any court order, or decided to dismiss your own bankruptcy petition due to creditors seeking court relief to retrieve property they had a lien on.
Chapter 13 bankruptcy
It is also known as a "wage earners" bankruptcy, it restructures debts into a payment plan that spans three to five years.
The best option is for those who own assets they wish to retain, like expensive jewelry or secured debts they'd like to stay up to date, like the mortgage.
Eligibility
You must have regular income.
Must be current on tax filings.
You have been charged for Chapter 13 within the last two years or Chapter 7 over the last four years.
You cannot have filed a bankruptcy petition in the previous 180 days that was dismissed for a variety of reasons, such as failing to appear in court or respecting the court's order.
Chapter 11 bankruptcy
Also known as a "reorganization" bankruptcy, this chapter is typically utilized by companies and other businesses.
The best option for companies that wish to remain operational.
Eligibility
Cannot have filed a bankruptcy petition in the past 180 days, which was rejected due to your failure to attend court or follow the court's orders or have voluntarily withdrawn your bankruptcy filing due to creditors seeking court relief to recover property they had a lien on.
Are you a good candidate for bankruptcy?
In the end, filing for bankruptcy isn't an easy choice You'll need consider the pros and cons of the long-term effects on your credit and debt. But in general, if:
You see no solution to repay your debts in five years.
The amount of debt you owe (excluding a mortgage) is more than 40% of your income.
You're paying the most you can toward your debts, but you're not making progress.
Debt payments are preventing you from meeting your financial objectives, such as saving for retirement.
If you're considering filing for bankruptcy take advantage of free consultations with an attorney who specializes in bankruptcy, and to better understand your financial situation and whether bankruptcy is the right choice for you.
Do you require a bankruptcy attorney?
The short answeris yes.
The bankruptcy process is long and complicated procedure. One form improperly filled out could result in the dismissal of your bankruptcy case. This means that you will need to wait for at least six months before filing again. to help you navigate the process and ensure that your paperwork is completed correctly.
A word of caution if you're thinking of filing bankruptcy without an attorney: The bankruptcy data shows that only 1.4 percent of Chapter 13 bankruptcy cases filed without an attorney in 2012 received a discharge, meaning the cases were closed and the eligible debts were discharged in accordance with the Federal Judicial Center.
In Chapter 7 bankruptcy cases filed with an attorney in 2012 95% were resolved successfully, compared with two-thirds of the cases that were filed without an attorney, according to data from the center.
Many bankruptcy lawyers will require to pay before filing, however there are options for you to assist .
How long will bankruptcy remain on your credit report?
Insolvency filing is the most damaging action you can cause to your credit as it can damage your credit for years to come .
But there is a bright spot: Your credit can start to improve after a few months of making the application, and the improvement could be particularly noticeable in the event that you're already in delinquency on your obligations.
A 2014 report from the Federal Reserve Bank of Philadelphia discovered that people who had filed Chapter 7 bankruptcy saw their scores rise from 538 on average up to an average 600 on a scale between 300 and 850 at the time that the case was discharged which usually takes six months.
There are actions you can take to assist .
• LEARN for Canadians?
What are alternatives to bankruptcy?
Depending on the kind as well as the amount You may also have other that could help resolve your debt.
Make use of this calculator to research the options for debt relief, such as an approach to managing debt from a nonprofit credit counseling agency or do-it-yourself techniques, as well as consolidation.
Be aware of where every penny gets spent
Look for ways you can spend your money on things that you truly love and less on things that you don't.
Author bios: Sean Pyles is the executive producer and host of NerdWallet's Smart Money podcast. His work has appeared in The New York Times, USA Today and elsewhere.
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