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Is filing Chapter 7 bankruptcy the right choice for you?
Many Americans find themselves in extreme debt with no recourse to pay. The United States Courts report that there were over 750,000 non-business bankruptcy filings in 2019, with over 773,000 cases in total.
If you find yourself in serious debt, you may have considered Chapter 7 bankruptcy as a way to discharge the amount. However, other options may exist and understanding which might best suit you can help you gain better control of your finances.
The ability to file
There are certain conditions for filing Chapter 7 bankruptcy. For example, your total debt must exceed your income. If you are unemployed and have no current income, it is likely you qualify to file. You may have to provide proof of hardship and an inability to pay before you are allowed to file.
Chapter 7 vs. chapter 13
Choosing a bankruptcy type that best suits your situation can have a serious impact on your financial future. Chapter 7 erases or discharges your debt completely, while chapter 13 reorganizes what you owe and provides you with a repayment plan you can manage according to your income. With Chapter 13, you may have to surrender property to help repay your debts, such as vehicles and real estate.
What kind of debt can bankruptcy discharge?
When someone is experiencing considerable financial debt, bankruptcy may be the best option for them to recover from debt. While bankruptcy may be the right choice for many, it does not eliminate or manage all debt. There are two forms of debt: secured and unsecured.
Bankruptcy only eliminates unsecured debt, meaning someone who files for bankruptcy will not be ultimately debt free after their discharge of debt. Even though bankruptcy does not discharge all debt, it is still a viable option for many people. In 2019, more than 750,000 people filed for bankruptcy. SO what kind of debt can bankruptcy eliminate?
Secured debt
Unsecured debt does not have any collateral, or security, attached to it. Without bankruptcy, if a borrower could not pay the debt, the lender would need to file a lawsuit to collect their losses. Popular examples of unsecured debt are:
Auto accidents and unmanageable debt
After a motor vehicle wreck, victims often face many challenges. Serious injuries, emotional trauma and losing the ability to work are often very hard. Moreover, all of these difficulties often give rise to other problems in one's life, especially from a financial point of view. Many people take on high levels of debt in the wake of a car crash, and it is imperative for people to understand their options when it comes to addressing this debt.
For some, payment plans and paying close attention to one's finances help eliminate debt. However, filing for bankruptcy is necessary, in some instances.
Medical costs, bills, lost wages and other problems
There are multiple reasons why the impact of auto accidents is often very devastating in terms of finances. Many victims struggle with medical expenses due to a crash, and some take on high levels of debt that they cannot afford to repay. Others fall behind on their bills, especially if they have to take time off work or cannot work any longer because of an accident. Furthermore, many people use their credit cards to get by, resulting in excessive interest charges that destroy their financial well-being further. When someone takes on debt that they cannot deal with, it is imperative to address the situation swiftly.
Does Chapter 7 stop debt collector calls?
Filing for bankruptcy is not an easy choice to make. Thousands of Americans struggle with overwhelming credit card debt, medical expenses and mortgages. However, for some in Maryland and in many other states across the U.S., claiming bankruptcy is a way to start fresh with a clean financial slate.
If you have been involved with late credit card payments, mortgage payments or had your medical expenses sent to a collections agency, you know first-hand how difficult it can be to keep up with creditor calls. It may seem as if those collectors will never stop calling. Yet, there are ways to stop the harassment.
What is an automatic stay?
Once you file for Chapter 7 bankruptcy, an automatic stay is put in place, according to the United States Courts. The stay bans any creditors or collection agencies from contacting you regarding your debt. These agencies cannot call you or correspond with you via email or mail. Furthermore, they are unable to continue pursuing lawsuits or garnishing wages.
Repairing credit after bankruptcy
For many individuals who find themselves in overwhelming debt due to unexpected medical bills or unpaid tax debts, bankruptcy offers a fresh start and a way to begin recovering financial stability. While filing for bankruptcy may lower an individual's credit score temporarily, there are several ways to increase the score after going through bankruptcy.
Bankruptcy and credit reports
Both chapter 7 and chapter 13 bankruptcy may offer benefits to individuals who are having trouble paying their bills. People who have a steady income may qualify for chapter 13, which may stop foreclosure proceedings and allow the filer to pay off secured debts within three years.
According to the U.S. Courts, once an individual completes all payments under the chapter 13 plan, he or she receives a discharge. This legal ruling releases the individual for any debts covered by the bankruptcy plan. Within a few years after the discharge, the chapter 13 information may drop off the individual's credit report, allowing him or her to improve the score.
What are signs of debt collection abuse?
Unexpected medical bills, job loss and economic uncertainty are just a few of the things that may cause you to feel overwhelmed by debt. If you are unable to pay some bills for a while, those balances may go to a debt collection service. Unfortunately, many collectors use unfair and/or abusive tactics.
The Federal Trade Commission provides information on the laws relating to fair debt collection. Recognizing abusive and deceptive practices may help you avoid financial issues.
Requirements for debt collectors
According to the FTC, debt collectors may contact you through the phone, email, text messages or letters. However, laws prevent them from making phone calls to your home early in the morning or late at night. When a debt collector contacts you, he or she must provide you with a written notice that includes specific details: the name of the creditor, the amount you owe and the steps you should take if the debt is not yours.
Does chapter 13 bankruptcy save your home from foreclosure?
Considering Bankruptcy
A volatile economy makes it challenging to keep paying your bills on time when something unexpected happens. Even a relatively simple medical issue may lead to high doctor's bills and a temporary loss of income. It may only take a few months for your debt to spiral out of control, leaving you with delinquent mortgage payments and the threat of foreclosure.
If you are facing foreclosure but want to keep your home, filing for bankruptcy may give you the opportunity to recover from overwhelming debt without losing your home.
Chapter 13 bankruptcy requirements
According to the U.S. Courts, chapter 13 bankruptcy may allow you to avoid foreclosure on your home. This type of bankruptcy, a wage earner's plan, requires you to have a regular source of income to meet the eligibility requirements. If you do have a steady income, you may work with the court to develop a repayment plan that generally lasts for three years. During this time, you make reasonable payments to a trustee who distributes the money to your creditors according to the terms of the bankruptcy plan.
Get the facts behind these common bankruptcy myths
Misconceptions about bankruptcy prevent many people from relieving themselves of debt they can no longer pay. If you struggle with credit card bills and worry about losing your home, bankruptcy may be a route worth exploring.
These are the truths behind four of the most pervasive bankruptcy myths.
"You will lose assets if you file for bankruptcy"
In fact, most people who file Chapter 7 or Chapter 13 bankruptcy keep their homes, cars and other possessions. States and the federal government offer a list of property you can exempt from your filing. The court may require you to sell assets beyond the exemption threshold to pay debt.
"Bankruptcy erases all debts"
Certain debts are not eligible for bankruptcy discharge, including student loan debt, past-due child support, spousal support, payment for criminal restitution and tax debt accrued within the past three years. In addition, if you exceed the income for a Chapter 7 bankruptcy, you will repay a portion of your reorganized debt with a Chapter 13 filing. Personal loans, credit cards, medical bills and other unsecured debts are generally eligible for discharge through bankruptcy.
What happens to my credit score if I do not pay my tax debts?
Medical bills and student loans get a lot of media attention when it comes to the collective American debt. What people do not hear enough about are the Americans struggling to repay hefty tax debts to the IRS. Does this describe your situation?
When people have big tax debts, the assumption is that the individual attempted to dupe the IRS and got caught. This is certainly a possibility, but many people do not file their own tax returns. It is frightening what some professionals can do to skim money off the top at your expense.
Even when you do file your own taxes, you may make mistakes that cost thousands later on. In fact, the IRS itself can make a mistake, such as continuing to send out automated billings for a settled bill.
How does it impact your credit?
Even when the bill is legitimate, unpaid taxes may not end up affecting your credit score at all. Credit Karma reports that this was not the case until 2018 when the three credit bureaus stopped including tax liens on credit reports. Even though they might not directly affect your credit score, there are other problems it can create.
What is the Maryland Chapter 7 means test?
If you have begun thinking about filing Chapter 7 bankruptcy, you need to know about the means test you must pass in order to qualify. FindLaw explains that per the 2005 Bankruptcy Protection Act, each state first determines its residents' median annual income and then determines whether or not your income falls below this level. If so, you qualify,
In Maryland, the median annual income for one person is $69,529; for a couple, it is $88,815.
Median income inclusions
To determine your annual income, you must first determine your income for the last six months and then multiply by two. Your median income calculation must include such things as the following:
- Employment income, including salary or wages, overtime amounts, bonuses, tips, commissions, etc.
- Self-employment income, including the gross income you receive from your profession, business or farm
- Interest, dividend and royalty payment income
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