Bankruptcy 101: Everything You Need to Know

If there’s one thing they don’t teach you in school, it’s how to manage your finances. For a lot of us, it takes trial and error to determine the best way to handle our money. Unfortunately, sometimes life gets in the way, and debts grow beyond what we can realistically pay off. In these cases, bankruptcy can be an effective way to discharge some debts, pay back the rest, and get back on your feet.

However, there’s a lot to know about bankruptcy and how to reach the most favorable outcome. In this blog post, you’ll find everything you ever wanted to know about bankruptcy but were too afraid to ask.

Signs that Bankruptcy May Be Imminent

Most of us have missed a payment or two and have had to work to get things back in order. A few financial missteps do not typically add up to bankruptcy. However, there are some red flags that signal you may be heading toward bankruptcy. They are as follows:

  • Living beyond your means. Or consistently spending far more than you make each month.
  • Inconsistent payments or no payments at all. Falling behind on your payments can create a snowball effect, where you’re just too far behind to catch up.
  • Multiple maxed out credit cards. Credit cards can often serve as a crutch but at some point, you will reach your limit.
  • No savings. It isn’t always easy to set aside cash but having no emergency savings at all can be a recipe for disaster.
  • If you’re looking at foreclosure, it may be time to consider a way to restructure your debts.
  • Collection notices and phone calls. Bankruptcy can provide you with a means to pay back your debts and avoid the stress of constant contact from bill collectors.
  • Medical bills piling up. These can be extremely expensive especially if you receive little to no coverage from your insurance.

The Two Main Types of Personal Bankruptcy

Filing for personal bankruptcy is very different from filing for business bankruptcy as you might expect. Typically, when discussing personal bankruptcy, you’re looking at either Chapter 7 or Chapter 13.

Chapter 7 Bankruptcy

Sometimes people refer to Chapter 7 bankruptcy as “straight bankruptcy.” This is because Chapter 7 generally allows individuals to discharge debts quickly. However, there are some debts that cannot be discharged such as student loans and child support. Those who file for Chapter 7 usually relinquish some assets to pay back the debt they owe.

Chapter 7 bankruptcy can also be used to delay foreclosure of your home. You must qualify for Chapter 7 bankruptcy through a means test, which compares your income with the median income your state of residence.

Chapter 13 Bankruptcy

Individuals who do not pass the means test may look at filing for Chapter 13 bankruptcy. In this form of bankruptcy, you follow a payment plan to pay back some of the debts you owe to creditors. This plan is set up by the court and can range from 3 to 5 years on average.

Chapter 13 is an attractive form of bankruptcy to those who wish to keep their home or other property. To be eligible for filing, you will need to receive credit counseling and debtor education before being discharged.

Now that you have a primer on bankruptcy, it’s time to determine the most appropriate way to deal with your own financial situation. Deciding to file for bankruptcy is a deeply personal decision and one that is best made with professional guidance and counsel.

At Tyler, Bartl & Ramsdell, P.L.C., we’ve helped countless clients find relief from debt and a fresh start. Contact us today by calling (703) 549-5001 and asking for a free consultation.