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4 benefits of filing for bankruptcy
Significant debt can happen to anyone, for many reasons. You may have lost your job, gone through a recent divorce or incurred significant medical debt. Filing for bankruptcy may seem like a step backward, but really, it is a way to move forward while protecting the things that matter.
Filing for bankruptcy offers you many potential benefits, some of which you can take advantage of right away.
1. Filing options
As an individual consumer, either Chapter 7 bankruptcy or Chapter 13 bankruptcy may be available to you. Each has its own eligibility requirements, but you typically qualify for either one or the other.
2. Property protections
While Chapter 7 sometimes requires liquidation of property, i.e., selling assets to pay off debts, Maryland law imposes some exemptions. If your property falls under one of these exemptions, you do not have to sell it. Exempt property may include your vehicle and at least some of your equity in your home. It can also include personal property and retirement accounts.
What are reasons to keep bankruptcy paperwork safe?
The process of paying off your debts through Chapter 13 bankruptcy may have felt like an ordeal, but you finally see your bankruptcy coming towards an end. As you contemplate returning to a life free from debt, you must also plan to have your bankruptcy paperwork safe and available should you need it.
It is natural to want to keep your past bankruptcy out of sight and out of mind. However, as U.S. News and World Report explains, there may be times when you will need to provide some of your old bankruptcy documents.
Providing paperwork to a lender
The subject of your bankruptcy may come up if you seek a loan, particularly if you want a major loan to buy a house or a business. Your lender may ask to see your bankruptcy petition or the court's notice of your bankruptcy filing. Providing this information may be helpful since it allows your lender to learn as much about your bankruptcy as possible and not just the simple fact that you went bankrupt.
Can Chapter 7 discharge my tax debt?
If you contemplate filing bankruptcy and owe back taxes to the IRS, you may have heard that Chapter 7 will not discharge tax debt. While generally true, Upsolve.org reports that Chapter 7 can discharge some income tax debts under some circumstances.
To make your IRS debt dischargeable under Chapter 7, it must meet the following criteria:
- It must be three or more years old.
- You must have filed a tax return for it at least two years prior to filing bankruptcy.
- The IRS must have determined the debt amount at least 240 days before you file bankruptcy.
Bankruptcy alternatives
You have two alternatives to bankruptcy when dealing with your federal income tax debt: an IRS payment plan and an Offer in Compromise. Both require you to work directly with the IRS, and neither discharges your debt, only gives you extra time to pay it.
Payment plan
You can apply online for a payment plan. Depending on the amount you owe and the time you believe you need to pay it, you may or may not need to pay a set-up fee. Generally, the IRS does not charge for payment plans of 120 days or less. Longer payment plans have a graduated set-up fee, starting at about $30.
What is the top reason for bankruptcy?
If exorbitant unpaid medical expenses have you seriously considering bankruptcy, you are not alone. CNBC reports that approximately 530,000 American families file bankruptcy every year because of medical debt.
The top six reasons people give for filing bankruptcy consist of the following:
- Medical debt – 66.5%
- Unaffordable mortgages or foreclosure brought about by a drop in income – 45%
- Living beyond their means – 44.4%
- Financially helping friends or relatives – 28.4%
- Student loans – 25.4%
- Divorce or separation – 24.4%
Medical debt
The Affordable Care Act, better known as Obamacare, went into effect in March 2010. Its primary goals included the following:
- To give more people affordable health insurance
- To expand the Medicaid program
- To support innovative medical care delivery methods
Despite its lofty goals, however, the ACA failed to resolve America's health care crisis. Nor did it change the proportion of bankruptcies filed because of medical debt. In fact, in the three years following its implementation, such bankruptcies actually increased slightly, from 65.5% to 67.5%.
What is a gray bankruptcy?
If you are age 65 or older and facing substantial credit card debt issues, you are not alone. The National Consumer Law Center reports that, nationwide, people in this age demographic have approximately four times as much credit card debt as people aged 25 and younger. In fact, people between the ages of 65 and 69 saw their credit card debt increase by an average of 217% between 1992 and 2001.
Since then, you likely have had to rely on your credit cards more and more to make ends meet. Several factors, including the following, probably have contributed to this unfortunate situation:
- Your health care costs have skyrocketed.
- Your Medicare coverage has gaps.
- Your Social Security benefits cannot keep pace with your ever-increasing costs.
- You have depleted what little savings you managed to accumulate over the years.
All of this makes you a prime candidate for the phenomenon known as gray bankruptcy, the term applied to bankruptcies filed by those over the age of 65.
Should I work with a credit counselor?
If you currently have more debt than your income can support, you may feel tempted by many of the expensive debt settlement ads you come across. These professionals sometimes do fulfill their promises to reduce or eliminate your debt, but consider credit counselors before making a final decision.
When completing the bankruptcy process, you may need to complete credit counseling courses before moving forward. Non-profit organizations often provide these courses as well as services to assist with financial literacy. Some people who complete the courses get finances back on track and may not need to go through with the bankruptcy process.
What are the benefits of hiring credit counselors?
When you need to work on your finances, no price sounds better than free. Credit counselors rarely charge fees for advice. The services they do charge for may still cost a lot less than hiring for-profit professionals. These include the following:
- Negotiation of lower payments and interest rates
3 basics of filing for chapter seven bankruptcy in Maryland
If you are a recently divorced single mother in Maryland struggling to handle bills and keep up with debt payments in spite of working a a full time job with decent pay, filing for bankruptcy may be an option to consider. There are three main chapters of the federal Bankruptcy Code, 7, 11 and 13. There is also a Chapter 12, which is essentially Chapter 13, but solely for family fishermen and family farmers.
Chapter 7 and Chapter 13 are the two options for consumer bankruptcy. Chapter 7 is simpler, quicker and generally the one more suited for aiding single parents with low or moderate income.
What is Chapter 7 bankruptcy?
The government assigns you a trustee. He or she takes control of your nonexempt property, liquidates it and uses the resulting proceeds to pay off your creditors. This method may clear your debt within months.
What is the bankruptcy means test?
If you make more than the average income for Maryland households the same size as your own, then you have to complete the Maryland means test calculation. Its results determine whether or not you are able to partially cover your debts through a Chapter 13 bankruptcy instead. If your household income is below the median, your debts are not mostly composed of consumer debt or you are a veteran and acquired them while on active duty or during a homeland defense activity, you do not have to fulfill this requirement.
Understanding the advantages of Chapter 7
The majority of bankruptcies filed by individuals in the United States are Chapter 7 bankruptcies. A Chapter 7 bankruptcy is a liquidation bankruptcy. This is where the debtor will give up valuable property with the goal of paying off creditors.
In order to file for a Chapter 7 bankruptcy, you must meet specific income limitations. Assuming that you meet the requirements, there are many advantages to a Chapter 7 bankruptcy. According to FindLaw, with a Chapter 7 bankruptcy you get a complete fresh start, you can keep future income and there is no repayment plan to deal with.
What is the "fresh start?"
This is the entire goal of a Chapter 7 bankruptcy. With a successful Chapter 7 filing, you will have an entirely new start because the courts will eliminate your personal liability for certain kinds of debt.
Keep in mind that bankruptcies cannot discharge all debts. If you have liens against your property, child support payments or debts you incurred through fraudulent actions, you must still pay these back. It is also usually not possible to discharge student debt with Chapter 7 bankruptcy.
What happens to your retirement in bankruptcy?
If you are close to retirement but find yourself having to file for bankruptcy, a top concern will naturally be how this will impact your retirement accounts. When filing Chapter 7, the court will look to seize any non-exempt assets so that it can liquidate them and use the money to pay back your creditors.
Luckily, you have some protection for your retirement accounts, depending on what type of account they are and how much money you have in them.
Your 401k
According to Bankrate, your 401k likely has the most protection against seizure in a bankruptcy. As long as you keep the money in your 401k account, the court will not touch it. However, the minute you access it, it becomes an asset that the court may seize.
So, you need to leave your 401k alone during your bankruptcy and check with your attorney about when you can access it without penalty from the bankruptcy court.
Other accounts
You may be able to exempt other retirement accounts you have using the state or federal exemptions. However, these exemptions are often quite low in value, so you may only be able to save a portion of any account. Checking, savings and other bank accounts are especially vulnerable in a bankruptcy. If your retirement savings is mainly in a savings account, you can expect to lose most if not all of it to the liquidation process.
What are your obligations as a debtor?
Maryland residents like you may find yourself in a position where debt overwhelms you. When pushed into a corner like this, your options often feel limited. You may turn toward bankruptcy feeling like it is a last resort, but it is not.
Bankruptcy is a helpful tool that can get people like you out of hot water. But if you opt for Chapter 13, you need to know how it will impact you and what your obligations are.
Starting off on the right foot
Forbes discusses your basic obligations under Chapter 13 bankruptcy. The first obligations include filing the necessary paperwork at the start of the process. You should file a petition for Chapter 13 bankruptcy in your local bankruptcy court. The court also requires documents like your repayment plan and most recent tax return. You must also submit filing and administrative fees at the time.
Then comes your primary obligation: repaying creditors. Unlike Chapter 7, Chapter 13 works under the assumption that you can handle your debt if you restructure it. In accordance, the court expects you to pay those debts off.
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