What Is the Downside of Filing for Bankruptcy?
Bankruptcy can end some financial difficulties, but it can also have long-reaching effects on your credit, so it’s important to know the facts before making a final decision. Here are the answers to some common questions about filing for bankruptcy:
What Is Bankruptcy?
Bankruptcy, by definition, is the act of filing paperwork with the court explaining that you don’t have enough money to pay your debts and asking for them to be erased or for modified payment terms.
What Happens When You File For Bankruptcy?
What happens next varies with the type of bankruptcy you file for, but in most cases, some or all of your debts will be dismissed. In some situations, you will need to reaffirm the debt to keep an asset like your home or vehicle. In a Chapter 7 bankruptcy, your non-exempt assets will be liquidated to pay your debts. However, most people only have “exempt” assets that do not get liquidated. Exempt assets include reasonable equity in a home or car, household items and retirement plans.
You will have a “meeting with creditors” to answer questions posed by the Chapter 7 Trustee and any creditor who attends. Approximately two months after your meeting of creditors, you will receive your “discharge” which essentially erases general unsecured debts like credit cards and medical bills. Some debts are non-dischargeable such as student loans, child support, alimony, and certain back taxes. You will still need to keep paying for these.
Why Do People File Bankruptcy?
Filing bankruptcy can happen for many reasons, including medical bills, income loss, or a business not working out as planned. Sometimes you can work hard and do everything right, and life throws you a curveball. In other cases, people may get overextended and not earn money to pay back a debt quickly enough. Many things can happen to cause financial strife, but the important thing to know is that you can find help and make a plan to get back on track.
How Long Does Bankruptcy Stay On Your Credit Report?
Under bankruptcy law, it can remain in the public records section of your credit report for seven or ten years, depending on the type of bankruptcy you choose. A Chapter 7 filing lasts up to ten years, while a Chapter 13 bankruptcy will fall off your credit report after seven years.
Can You Buy a House After Bankruptcy?
Yes, although not immediately. In most cases, you’ll need to wait two to four years for the court to discharge or dismiss your bankruptcy. Keep in mind that with the bankruptcy still on your credit report for seven or ten years, you may get approved for a mortgage but at a higher interest rate. It’s generally a good idea to spend a year or two reestablishing and building your credit score before buying a house. If you have credit cards, you may be able to keep these, but in many cases, they will be canceled when you file for bankruptcy. When this is the case, you may be able to get a secured credit card through your bank. Typically these will have a low credit limit that doesn’t exceed what you have in your bank account by much.
Can I Keep My Car If I File Bankruptcy?
In most bankruptcies, it is possible to keep your car. With Chapter 7 bankruptcies, some of your assets may be liquidated to pay your debts, but the court will usually allow you to keep necessary items like a car you need to get to work or the home you live in. If these are paid for, you most likely won’t have any difficulty keeping them. If you still have a car note, you will probably need to reaffirm your debt and continue paying for the car to keep it under Chapter 7. Chapter 13 bankruptcies allow you to keep your assets, but again, you must agree to continue paying the bills. In some cases, you may be able to get a smaller monthly payment. Your bankruptcy attorney can help you determine the correct type of bankruptcy for your situation.
One thing to remember is that with a Chapter 13 bankruptcy if you fail to keep up with the payment plan you’ve agreed to, your creditors may be able to repossess your vehicle. Talk to your bankruptcy attorney if you don’t think you can continue making the payments. They may be able to propose a deal with the entity that holds the debt on your car. For example, they may arrange for you to pay what the car is worth right now. This is a good option if the car is a few years old and has depreciated considerably.
Are There Alternatives to Bankruptcy?
Yes, although these are not ideal for every situation. In some cases, we may be able to work out a deal with a client’s creditors to accept a payment plan. It may be in many creditors’ best interest to allow you to pay some amount, even if it’s smaller than the minimum, rather than have you file for bankruptcy, leaving them with nothing. However, there are also situations where the debt is too staggering compared to the client’s income, and it just won’t work out. In these circumstances, an attorney may recommend bankruptcy as the best solution for your situation.
If My Spouse Files for Bankruptcy, Do I Have to File Too?
No, but it may be a good idea. It depends on the debt situation, and you should discuss this with your Albuquerque bankruptcy lawyer before making a decision. If most of the debt is in your spouse’s name and not yours, or they have non-dischargeable debts like student loans or alimony, it may be better if they file alone. However, if you both have debts, you can double your bankruptcy exemptions (assets you’re allowed to keep) if you file jointly. Another thing to know is that if you and your spouse have any joint debts listed in the bankruptcy, you will still be responsible for paying those after their debt is discharged.
New Mexico Financial & Family Law: Get Help With Your Bankruptcy Concerns
If you have questions or concerns about bankruptcy or want to explore all your options, please contact us at New Mexico Financial and Family Law. Your first consultation is always free, and we’ll be happy to explain your choices so you can make an informed decision. Call us today at (505) 503-1637.