Bankruptcy is a legal proceeding that offers relief to individuals overwhelmed by debt. By filing for bankruptcy, you enjoy the automatic stay. This means that your creditors cannot call you and demand payment. Additionally, you cannot be sued for unpaid debts.
Understanding the bankruptcy process allows you to make informed decisions and be prepared for the consequences. Depending on your category, filing for bankruptcy helps you eliminate some of your debts or make a repayment plan to pay them.
The process of filing for bankruptcy can be long and complicated. You must ensure you qualify for the category you wish to file under. Additionally, you must compile relevant paperwork, file the bankruptcy petition, and wait for the court’s decision. Seeking legal guidance is critical throughout your bankruptcy process.
Your attorney will help protect your rights and offer legal advice to ensure the best outcome. The following are some facts you need to know about bankruptcy before exploring this option of debt relief:
There are Two Main Types of Bankruptcy
Depending on your income and overall financial situation, there are two main types of bankruptcy from which you can choose:
Chapter 7 Bankruptcy
Most people in California will qualify for Chapter 7 bankruptcy. Under this form of bankruptcy, the court appoints a bankruptcy trustee, who liquidates your non-exempt assets to pay your creditors. Payment of creditors is made with priority. When no more money is left, the remaining debts are discharged if they are eligible for such.
Chapter 7 bankruptcy offers a fresh start since you will not be obligated to pay the debts. However, you could lose some of your assets, including your vehicle and home. Not all individuals experiencing financial distress will qualify for this type of bankruptcy. You must pass a means test administered by the court.
Chapter 13 Bankruptcy
If you qualify for Chapter 13 bankruptcy, the court facilitates a three- to five-year repayment plan to cover your debts. You can keep most of your property when you file this type of bankruptcy. A repayment plan includes affordable monthly installments for your debts. Chapter 13 bankruptcy is often available for individuals with high income and assets.
The repayment plan ensures that your unsecured creditors receive payment for an amount equal to or close to what they would have received from chapter 7 bankruptcy. The main benefit of filing for bankruptcy under Chapter 13 is reorganizing your finances without losing valuable assets.
Some Debts Cannot be Eliminated With Bankruptcy
The main objective of filing for bankruptcy in California is to avoid liability for your debts. Calls from creditors seeking payment can be annoying. When you file for bankruptcy and your debt is discharged, the creditors will have no legal grounds to demand compensation. Unfortunately, not all debts are dischargeable.
Whether you file bankruptcy under Chapter 7 or Chapter 13, you will still be liable for the following debts:
Alimony and Child Support
When you undergo a divorce or separation, you must sort out the issues of child support and alimony. If your ex-spouse receives custody of the children, you may be required to pay child support monthly. Sometimes, the family court may order that you pay spousal support when your ex cannot work and support themselves after a divorce.
Child support and alimony payments can add to the financial burden resulting from divorce, pushing you into bankruptcy. However, even when your bankruptcy is granted, you cannot eliminate these debts. Child custody and alimony are considered priority debts and must be paid from the proceeds of bankruptcy liquidation or your repayment plan.
Failure to pay for child and spousal support in bankruptcy can result in harsh collection measures like wage garnishment.
Student Loans
Most people who have been to college in California have student loans. Most people understand that you cannot discharge these debts in chapter 7 or chapter 13 bankruptcy. However, there are special circumstances under which you can discharge some of the student loans.
If you prove that paying the loans will cause financial hardships that prevent you from meeting your basic needs, the court can offer a discharge.
Additionally, you must prove that your financial situation is expected to continue. When you file for chapter 7 bankruptcy and need to catch up on your student loan payments, it may be difficult to prove the factors necessary to discharge the debt.
Income Tax
You cannot discharge debts from current income taxes by filing for bankruptcy in California. Like domestic obligations, you can file for Chapter 13 bankruptcy and use the repayment plan to cover your tax debts. However, if you file for chapter 7 bankruptcy up to three years after you have incurred the tax debts, you may be able to discharge them.
If you meet the requirement for a tax debt discharge, but the IRS proves that you engaged in tax evasion and other forms of fraud, your debt will remain non-dischargeable.
Criminal Restitution Debts
If you face a criminal conviction where another person suffered a loss, the court may order that you pay restitution, among other court fines. Depending on the nature of the crime and alleged losses, victim restitution may take a toll on your finances. Even when your bankruptcy is granted, you must continue to pay victim restitution.
Personal Injury Debts from Drunk Driving Accidents
When you are charged and convicted of drunk driving with injuries, the victims of your criminal acts may file a personal injury claim against you. A successful personal injury claim means that you must pay the victim for the damages and losses you caused. Filing for bankruptcy cannot save you from having to pay these debts.
If your assets are liquidated in Chapter 7 bankruptcy, the liquidation proceeds will be used to pay the victim. For individuals who file for bankruptcy under Chapter 13, the personal injury debts will be placed in the payment plan.
Bankruptcy is not Always the Best Option
Filing for bankruptcy offers numerous benefits to individuals who are overwhelmed with debt and have no money to pay the creditors. However, bankruptcy is only sometimes the right option for your situation.
Before you declare bankruptcy, you must consider the following negative consequences of the legal action:
Lowered Credit Score
Your credit score indicates your likelihood of paying your debts. Potential creditors will check your credit score when offering you a loan and determine the amount you deserve. Most people file for bankruptcy because they are unable to pay their debts. When you file for liquidation bankruptcy, some creditors will not be paid, which lowers your credit score significantly.
While you can rebuild your credit score, it may take a while. Bankruptcy remains on your record for up to ten years. When a creditor pulls your record, they can find the bankruptcy and use it to deny you a loan.
Loss of Assets
When you file Chapter 7 bankruptcy, the bankruptcy trustee will liquidate most of your assets and use the money to pay your creditors. Losing property you have worked so hard to earn can be devastating. If you want to protect your assets from liquidation, consult a bankruptcy attorney who will help you explore different bankruptcy exemptions.
Bankruptcy will not Eliminate All Debts
Another setback of bankruptcy you must consider before considering this debt relief option is that not all debts will be discharged. Even after you have been granted bankruptcy relief, you will shoulder the liability for these debts:
- Child support and alimony
- Tax debts
- Court fines and restitution
- Student loans
Employment Considerations
Filing for bankruptcy may indicate your inability to make proper financial decisions. Therefore, if you are in charge of trust funds or money at your job, you could lose your job. Losing your job during bankruptcy could add to your financial challenges.
If you are unsure whether bankruptcy serves your interests, discussing your options with your bankruptcy attorney before filing the petition in court would be best.
There are Some Alternatives You Can Explore Before Declaring Bankruptcy
The inability to pay your debts, among other financial difficulties, pushed you into bankruptcy. However, declaring bankruptcy is not the only way to cover your debts or have a fresh financial start.
Before filing for bankruptcy, you can explore the following options for debt relief:
Credit Counseling
When you feel that your debts are overwhelming, you should consider seeking the help of a certified credit counselor. The counselor will review your income and expenses and help you formulate a plan to help you put your finances in order.
If your situation is not dire, counseling and coaching from an experienced financial counselor may be the only thing you need to avoid bankruptcy. If circumstances require more intervention than counseling, the counseling agency may help you negotiate a repayment plan with your creditors outside of bankruptcy.
Debt Consolidation
You can explore debt consolidation when you foresee financial bankruptcy but have not missed payments for your loans. Debt consolidation involves moving high-interest credit balances into one loan with fixed monthly installments. Borrowing against your home or taking personal loans to pay the high-interest debts could help you avoid additional financial obligations from the interest.
You could qualify for a balance transfer credit card with 0% interest if you have a good credit score. Using debt consolidation to manage your debts can save you from high interest rates. However, running up new account balances could lower your credit score.
Debt Settlement
Debt relief or consolidation involves using debt relief companies that claim to lower your debt burden by negotiating with creditors. The debt consolidation company will advise you to stop paying your creditors before going into consolidation. Instead, you can put the money in a special account the company sets up for you.
When you accumulate enough funds in this account, you can negotiate with creditors to accept the amount instead of losing everything when forced into bankruptcy. Working with a debt consolidation company is unfavorable for most consumers due to the following disadvantages:
- Higher service fees. A debt settlement company will charge you 15–25% of the debt they help you settle. This amount is significantly higher than what you will pay for a credit counselor.
- Harm to your credit score. Missing out on monthly payments for your loans to build up a savings account can significantly harm your credit score. This could prompt your creditors to close your debt accounts and sell the debt to a debt collection agency.
- Decline of your plan by creditors. There is no guarantee that your creditors will agree to the plan. However, when you realize that the creditors will not move forward with the negotiated plan, you will suffer the consequences of missed payments.
Loan Modification
Loan modification involves negotiating with your creditors to modify the terms of your loan. This could include lowering the monthly installments and increasing the repayment period. Modifying your loan helps lower your financial obligations and save you from missed payments and high-interest rates.
Short Sale
Homeowners with financial struggles may struggle to pay debts, including mortgages. You can explore short sales if you have missed mortgage payments and want to avoid foreclosure. A short sale is when you sell your home for less. This allows you to recover some money and pay your balance on the mortgage.
Find a Competent Modesto Bankruptcy Attorney Near Me
When you are overwhelmed with personal or business debts, filing for bankruptcy is one avenue to eliminate the debt and avoid financial struggles. Filing for bankruptcy involves filing a petition with the court and waiting for the judge’s decision. Bankruptcy offers numerous benefits to individuals struggling with different types of debt.
However, there is more to bankruptcy than eliminating your debts. Filing for bankruptcy can significantly impact your credit score and employment opportunities. Additionally, you could lose your valued assets in the process. Before choosing bankruptcy, it would be wise to explore other options for financial relief to avoid the negative consequences of bankruptcy.
The legal aspect of bankruptcy can be very complicated for a common person to understand and navigate. Therefore, hiring and retaining a skilled bankruptcy attorney is critical. At Modesto Bankruptcy Attorneys, we offer expert legal guidance to clients seeking bankruptcy in Modesto, CA. Contact us today at 209-314-3010 to discuss more details of your situation.
