The pandemic has put a financial strain on so many families, and some of you may even feel like you’re in financial ruin.
The number of people filing for bankruptcy has actually dropped during the pandemic because of federal protections. But if you are considering bankruptcy as an option, there are things you should keep in mind.
There are two types of personal bankruptcy: Chapter 7 and Chapter 13.
“Bankruptcy is an important last resort,” said bankruptcy attorney Sarah Mancini.
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Chapter 7 is the most common type of bankruptcy and it’s known as “liquidation” bankruptcy. It allows you to keep your home if you aren’t behind on your mortgage payments, as well as your car and most belongings.
If you have a second home, recreational vehicle, or luxury items, they’ll be sold off to pay your creditors.
Chapter 7 is usually best for those with credit card and medical debt.
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“I think one rule of thumb for people to consider is whether the amount of debt they have is more than they can reasonably expect to be able to repay and if their creditors are starting to take action against them to collect,” Mancini said.
There are income limits on who can file for Chapter 7 bankruptcy.
If you qualify and the judge approved your case, the process is usually complete in three to four months. Your debt will be wiped out after the process is finalized.
Chapter 13 bankruptcy is known as the “Wage Earner’s Plan” because you need regular income to qualify.
The court will put you on a three-year to five-year repayment plan. You’ll be able to keep all of your assets, but don’t expect to keep much of your paycheck beyond basic living expenses.
“So it’s not a ‘get out of jail free’ card. It’s not a silver bullet,” Mancini said. “It depends on whether you can afford to pay what you’re required to pay under the bankruptcy code.”
Chapter 13 is best for people who are behind on their mortgage and the process is longer than Chapter 7.
It’s important to note that filing for bankruptcy will basically ruin your credit.
Chapter 7 stays on your credit report for 10 years and Chapter 13 stays on your report for seven years.
“I think the negative credit consequences sometimes get overstated because the reality is, for somebody who is overwhelmed by debt and has fallen behind already on their mortgage, their credit card payments, the credit score has already taken a hit,” Mancini said.
Mancini said you should also consider getting help from a professional before making the decision to file for bankruptcy.
“This is one of the most significant financial decisions that a person can make and if you do it alone without an attorney representing you, there’s a huge risk of getting something wrong and having bad consequences that can follow,” Mancini said.
There is free legal assistance available for those looking to file for bankruptcy.