Despite its often negative reputation, bankruptcy is a valid method for lowering debt that is available to many people who might not even know it. Most consumers know about bankruptcy and understand its basic concept, but might assume that it is only for large companies. In fact, filing for bankruptcy can save many individuals financial hardship and help get them back to financial stability quickly.
Many do not understand how bankruptcy works overall, let alone its many nuances and filing requirements. Sometimes bankruptcy is truly the best way to eliminate your debt provided conditions for filing are appropriately qualified. As it is with loan applications, approval is not necessarily guaranteed when filing for bankruptcy.
The process of filing for bankruptcy can be far more complicated than applying for a loan. What’s more, filing for bankruptcy usually must involve a hearing before a judge in bankruptcy court. During the hearing your financial records, history and assets are thoroughly assessed by a court trustee. Once the assessment is completed a verdict is decreed regarding your approval or dismissal. Sometimes, you would need to hire a lawyer to help walk you through the bankruptcy process.
If the court believes you are capable of paying your debts without needing to file bankruptcy, your application will be dismissed. However, if your bankruptcy is approved your debt becomes legally discharged, but more caveats and nuances continue to apply. For example, a bankruptcy sticks to your credit report for seven to ten years.
Normally, the removal of debt improves your debt-to-income ratio, which also improves your credit score (FICO). The presence of a bankruptcy anchors your FICO score and limits how much it increases, however. Another potentially unfamiliar nuance of bankruptcy involves selective debt dismissal. For example, student loan debt relief requires an entirely separate adversary proceeding to qualify for bankruptcy dismissal.
Only specific qualified tax debts are allowed to be dismissed during bankruptcies, and on rare occasions at that. Some creditors also fight to exclude the money you owe them from your bankruptcy case.
Most consumers file one of two common types of bankruptcy. Chapter 7, also referred to as liquidation bankruptcy, involves selling off your property and assets until most or all your debt is paid. Chapter 13, also referred to as reorganization bankruptcy, does not involve the liquidation of your assets. Rather, you are required to commit to a court-ordered repayment plan until all undismissed residual debt is paid in full.