Area of Law:
Bankruptcy is a legal process which protects people and businesses from their creditors when they are unable to make payments to them due to unavailability of funds. It has serious effects on not just the bankrupt person's life but can have far-reaching effects on their families too. Filing for bankruptcy can allow a bankrupt person to have a fresh financial start and can also stop creditors from stalking you for payments that are due, almost immediately, by either eliminating the legal obligation of paying those dues or at least bringing about a reduction in the amount of the dues to be paid. It does not nullify the debt itself.
Bankruptcy can have serious effects on a person's life and it is difficult to come out of it without being affected. Its effects can last for years to come, at least a decade, as it gets reflected in your credit report for at least 10 years. It lowers your credit score and that means that you might find it extremely difficult to get credit from banks. Even if you do manage to get it, it might come with lower credit limits and higher interest rates and restricted access to loans. If you're unable to manage your debts, bankruptcy can put you in the 'high risk' category, which will affect your ability to buy or rent a home.
Types of Bankruptcy:-
- Chapter 7 Bankruptcy: Also known as 'straight' bankruptcy or 'liquidation', this chapter has been designed to clear (discharge) your debts in exchange for all of your property, except for the property that the law allows you to keep (exempt). Whatever is not exempt will be sold off and the money obtained through that would be distributed to the creditors.
- Chapter 13 Bankruptcy: Also known as 'reorganization' bankruptcy, it is most suited for people who have property that they would like to retain as it enables people to pay off their debts within a period of three to five years. Additionally, people who have a fixed source of annual income can also be awarded a grace period. Debts, if any, still remaining after the completion of the grace period may also be discharged.
We understand that this process can get very scary. The important thing is to avoid believing everything you hear from unreliable sources and instead consult an expert bankruptcy attorney in your local area, if required. There are several myths that surround this phenomenon and it's time to dispel some of them.
- Filing for bankruptcy will clear all your debts: This is the number one myth that consumers seem to be harboring. But they couldn't be more wrong. Filing for bankruptcy will have little or no effect on loans such as home, car and/or student loans, alimony, child support, taxes, criminal fines etc.
- Filing for bankruptcy will improve my credit rating: Neither will your debts be cleared off nor will your credit rating improve. In fact, it can get you the worst rating you could ever have on your credit report and things can stay that way for up to 10 years. Long time, huh!
- Filing for bankruptcy means losing everything: This, too, is a common myth that deters people from filing for bankruptcy. You will not lose everything you own, but the extent of property and valuables that you can hold back depends from state to state, based on your total asset value.
- Finishing your credit card limit and then filing for bankruptcy: Wow! If only you could get away with that! But that's not bankruptcy. That's just fraud. (Even you know that!)
- If you file for bankruptcy, everyone will know: No one will know of your filing for bankruptcy besides your creditors and the trustees. Unless you, yourself, tell others.
- In case of married people, both spouses have to file for bankruptcy: This holds true only if both, the husband and the wife hold debt(s) jointly. Otherwise, needless to say that the trustee will ask the other spouse (who hasn't filed) to pay up for the debt. However, if only one of the spouse holds a debt, he/she can file for bankruptcy only under his/her name.
- Filing of bankruptcy can be done only once: This is not true. One can file for bankruptcy once every eight years (from the date when the previous case was filed) under Chapter 7 bankruptcy. For Chapter 13 bankruptcy, you can file more often than that.
- Filing for bankruptcy is a tedious process: Even though going through the procedure by yourself is not recommended, the process is definitely not tedious. It's always better to look for legal advice from experts with relevant experience in this field regarding the course of action to be taken in such matters.
- Filing for bankruptcy will prove that I am a failure: This does not point to any sort of personal failure. There can be several unforeseen reasons for you to have filed for bankruptcy ranging from the economic downturn to losing your job, problems in your marriage, certain health issues, etc. Instead of looking at it as a failure, you could look at it as a proactive measure taken by you to protect yourself, your family, and your assets.
Debunking some of the myths might help you in deciding if filing for bankruptcy is the right thing for you to do. Educating yourself about the correct way out for you is always crucial.