Bankruptcy is a last resort for many people in debt. It effectively wipes what you owe in just 12 months but has a huge lasting impact on your credit rating and living situation. You may be at risk of losing your home if you own it and any other assets you may have. It can also affect your employment too. This is why it’s a good idea to look into how you can reduce the likelihood of needing to take it on. Debt can be damaging in many ways, and it affects more people than you might think. At the end of March 2021, household debt in the U.S. including mortgages, auto and student loans, and credit cards reached a total of $14.64 trillion. That’s a lot of money, and it’s not all because of just overspending. Often, circumstances outside your control can cause you to fall into debt. This may include job loss, long-term disability, or medical bills. If you’re faced with a large amount of debt, you may feel like bankruptcy is the only way to go. But bankruptcy may not be necessary, depending on your situation. Bankruptcy can have a devastating effect on your credit score. It can stay on your credit report for up to 10 years. Here are some ways you can avoid bankruptcy to keep your credit score intact. Increase Your IncomeIncreasing your monthly income could give you extra money to put toward your debt. If you can, pick up extra hours at work, apply for a part-time job, or start a side hustle to bring in extra cash. Alternatively, you can sell any spare items, such as furniture or jewelry, and use the money to pay down your debt balances. The sooner you take action, the better. If you wait until you’re behind on payments, it may be too late to catch up and avoid further action from your creditors. Reduce Your SpendingSpending less money may allow you to dedicate more of it to paying down your debt. You may be able to free up money in your budget by cutting cable, canceling your gym membership, or skipping takeout for dinner. This could help you pay off your debts over time to avoid filing bankruptcy. Review your budget and consider switching to a new one to find areas where you can spend less and pay more money toward your debt. Negotiate With CreditorsMany creditors are willing to work with you, but you have to communicate with them proactively. Let your creditors know you are having financial difficulty and want to avoid bankruptcy. Express willingness to pay off the debt, and ask if they can help make it easier by lowering your monthly payment or interest rate or even both. Many credit card companies and banks have hardship or payment assistance programs intended for this type of situation. Seek Consumer Credit CounselingIf you’re feeling overwhelmed, getting help from a professional consumer credit counseling agency may bring some clarity to your finances. A credit counselor can review your finances to help you figure out a budget, and may potentially work out a debt management plan with your creditors. Under a debt management plan, you work to repay your debts in three to five years.5 First, the credit counselor negotiates with your creditors to get you a lower monthly payment. Then, each month, you send a single lump-sum payment to the credit counseling agency, which then distributes your payments to your creditors. Settle Your DebtDebt settlement isn’t the ideal solution, but you may consider it if you’re on the brink of bankruptcy. Settling a debt means you pay the creditor a percentage of the total amount due to satisfy the debt. Once you reach a settlement agreement, be prepared to pay the settlement amount in a lump-sum payment. While there are debt-relief companies that can settle debts for you—for a fee—you can do this on your own. Start by focusing on debts that already are charged-off or in collections. On top of that, your credit score could be impacted if the debt-relief company encourages you to intentionally fall behind on payments so it can negotiate a settlement. Before Doing Anything Else, Decide If Filing Bankruptcy Is Right for YouBefore jumping in, you need to determine whether filing bankruptcy will help you. Bankruptcy is a powerful debt relief tool, but only if it makes sense for your financial situation. A bankruptcy discharge does not wipe out certain non-dischargeable debts like most student loans, child support obligations, alimony, and recent tax debts. If you have any cosigners, they will not be protected by your personal bankruptcy. If you have great credit when your Chapter 7 bankruptcy is first filed, your credit score will likely drop a bit at first. Most people are able to rebuild their credit and have a better score within a year of getting their bankruptcy discharge. Anyone can file Chapter 7 bankruptcy without a lawyer. Here is an overview of the steps you’ll need to take to obtain your fresh start. How to File Chapter 7 Bankruptcy• Collect Your Documents Collect Your DocumentsYour first step is to collect all your financial documents so you understand the current state of your finances. Start by getting a free copy of your credit report. You are entitled to one free report from each one of the three credit bureaus per year. Some of your debts may not be listed on your credit report. Common examples include medical bills, personal loans, payday loans, and tax debts. Make a list of all debts not on your credit report so you don’t have to look for the information when you’re filling out your bankruptcy forms. In addition to your credit report, you will need the following documents: Having these documents next to you will help you get an accurate picture of your financial situation. Take Credit CounselingEvery person who files for bankruptcy has to take a credit counseling course in the 6 months before their bankruptcy petition is filed with the court. This is a requirement in both Chapter 7 and Chapter 13 cases. The course has to be taken through a credit counseling agency that is approved by the Department of Justice. Credit counseling courses like this one give you an idea of whether you really need to file for bankruptcy or whether you could get back on your feet through some type of informal repayment plan. The course takes at least one hour and can be completed online or by telephone. The course fee ranges from $10 to $50, depending on the provider. If your household income is under 150% of the federal poverty line, you should be able to get this fee waived. Once you complete the course, you will receive a certificate of completion. Keep it. Bankruptcy laws require that you provide a copy of this certificate to the court when you file your bankruptcy forms in Step 5. Complete the Bankruptcy FormsThe bankruptcy forms include at least 23 separate forms, totaling roughly 70 pages. The bankruptcy forms ask you about everything you make, spend, own, and owe. You’ll also include some bankruptcy basics, like what type of bankruptcy you’re filing under and whether a bankruptcy lawyer is helping you. If you hire a lawyer, they will complete the forms for you based on the information you submit to their office. If you can’t afford to hire a lawyer but don’t feel comfortable completing the forms on your own. Get Your Filing FeeThe federal court charges a filing fee of $338 for a Chapter 7 bankruptcy. This amount is typically due when the bankruptcy petition is filed with the court. If you don’t have the funds to pay the filing fee now, you apply to pay your fee in installments, after your case has been filed. You can ask to make up to 4 monthly payments. If paying in installments isn’t even possible, you can submit another form to apply for a fee waiver. To qualify, your total household income must be under 150% of the federal poverty line. The court will decide whether bankruptcy laws support granting you a waiver. This happens after your bankruptcy petition. If your application is denied, the court will typically order you to pay the fee in installments. Print Your Bankruptcy FormsOnce you have prepared your bankruptcy forms, you will need to print them out for the court. You must print them single-sided. The court won’t accept double-sided pages. You will also need to sign the forms once they are printed. You will need: Most bankruptcy courts require just one signed original of the petition, but some courts require additional copies. So, before you head out to submit your forms, call your local bankruptcy court to find out how many copies you will need to bring and confirm you have all the required local forms. Go to Court to File Your Bankruptcy FormsOnce you enter the doors of your local courthouse, you will be greeted by security guards, who will ask you to pass through a metal detector. Once you pass security, you will go to the clerk’s office and tell the clerk that you’re there to file for bankruptcy. They will take your bankruptcy forms and your filing fee (or application for a waiver or to pay the fee in installments). Do not submit your bank statements or tax returns to the court. These documents go to the trustee after the case is filed. for more. While you wait, the clerk will process your case by scanning your forms and uploading them to the court’s online filing system. This usually takes no more than 15 minutes. Once done, the clerk will call you back to the front desk and give you: Mail Documents to Your TrusteeThe Chapter 7 trustee is an official appointed by the court to oversee your case and liquidate, or sell, nonexempt property for the benefit of your creditors. Not all types of bankruptcy require the involvement of a bankruptcy trustee, but both Chapter 7 and Chapter 13 cases have one. Pay attention to mail you receive from the trustee after filing your case. The trustee will send you a letter asking you to mail them certain financial documents, like tax returns, pay stubs, and bank statements. If you don’t send the trustee the requested documents following the instructions provided in their letter, you may not get a discharge of your debts. Take Bankruptcy Course 2After filing your bankruptcy forms, you will need to complete a Debtor Education Course from an approved credit counseling agency. It can be completed online or by phone and typically takes at least 2 hours and costs between $10 – $50, unless you’re eligible for a waiver. The purpose of the course is to educate you on making smart financial decisions going forward but does not provide legal advice about the bankruptcy process. You’ll learn how to prepare a budget and avoid incurring debt with high interest rates. You’re not eligible to receive your bankruptcy discharge and obtain a fresh start if you don’t complete the course and file your certificate of completion from the credit counseling agency with the court. Attend Your 341 MeetingYour 341 meeting, or meeting of creditors, will take place about a month after your bankruptcy case is filed. You’ll find the date, time, and location of your 341 meeting on the notice you’ll get from the court a few days after filing bankruptcy. The main purpose of the 341 meeting is for the case trustee to verify your identity and ask you certain standard questions and most last only about 5 minutes. Your creditors are allowed to attend and ask you questions about your financial situation, but they almost never do. Dealing with Your Car LoanIf you own a car that you still owe on, you’ll have to let the bank and the court know what you want to do with it one of your bankruptcy forms. If you want to surrender the car to the lender and discharge the debt, you don’t have to do anything other than stop making your payments. The bank will either file request with the bankruptcy court to ask permission to retake the car, or wait until your discharge is granted before picking it up. If you want to keep the car, you can either reaffirm the loan or redeem the car. If you’re reaffirming your loan, the bank will send you a reaffirmation agreement after your case is filed. You have to complete and sign the agreement and return it to the bank within 45 days from your 341 meeting. The bank files the signed agreement with the court for approval. To redeem the vehicle you have to file a motion with the court and, once granted, buy the car from the bank for its current value. This gets you out of having to pay the amount left on the loan, but payment has to be made in one lump sum. Free Initial Consultation with LawyerIt’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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