Due to COVID-19, more people are thinking about debt and bankruptcy than ever before. “The most common causes of personal bankruptcy include job loss, medical problems, and divorce. In this current crisis, bankruptcy may truly be the only real solution for many families and small business owners who never dreamed they would need it,” MarketWatch writes.
Over 22 million Americans filed for unemployment benefits in March 2020 alone. Plus, 70% of U.S. households are worried about being unable to pay upcoming bills and missing loan payments.
Debt is not unique to the pandemic. Years before the pandemic took its hold in the U.S. and all across the globe, 12.8 million Americans filed for bankruptcy between 2005 and 2017, according to the Administrative Office of the U.S. Courts. An overwhelming 46% of those filings were related to medical bills.
These figures make it clear. Bankruptcy is a popular solution for repaying or even erasing debts. Even so, there are a shocking number of U.S. households who do not properly understand it. If you are wondering about the particulars of bankruptcy, like what it is and how does the bankruptcy process work, you’re in the right place.
Learn more about the specifics of bankruptcy below.
What is bankruptcy? How does the bankruptcy process work? There are several different types of bankruptcy. Simply put, working with a court and a bankruptcy firm will give you the option to either pay off debts over time or to erase eligible debts altogether.
Filing for the most popular types of bankruptcy, Chapter 7 bankruptcy and Chapter 13 bankruptcy, involves many of the same steps. First, work with an attorney to honestly evaluate your debts.
During that process, make certain that you have exhausted all of your options. Bankruptcy is an effective solution, but it should not necessarily be your go-to option. Filing Chapter 7 bankruptcy takes four to six months, while paying off all your debts using Chapter 13 bankruptcy can take up to three to five years. It will also remain on your credit report for a number of years. That means, before filing for bankruptcy, it is best to take advantage of deferment, loan modification, and other means of paying off debts.
When you have exhausted all other options and still believe that bankruptcy is the most effective option for you, the next step is to take any required pre-filing courses, file the appropriate forms, and to gather relevant documents, like tax returns, pay stubs, and bank statements.
After filing, if the court agrees to take your case, you will either work with a bank trustee to liquidate non-exempt property to pay off a portion of your debt and eliminate remaining eligible debts (Chapter 7) or work with the court to reorganize debts and create a repayment plan spanning three to five years (Chapter 13).
How does the bankruptcy process work? For a better understanding of the process, it helps to know the different types of bankruptcy. There are three main types of bankruptcy, Chapter 7 bankruptcy, Chapter 13 bankruptcy, and Chapter 11 bankruptcy.
Chapter 7 bankruptcy is the most popular type of bankruptcy, making up 62.4% of all bankruptcy filings. It is often called “straight” bankruptcy or “liquidation” bankruptcy. When you file for Chapter 7 bankruptcy, a court will work with you to eliminate eligible debts, including credit card debts and medical bills. The court is also able to discharge certain loans, like unsecured personal loans.
Chapter 7 is referred to as liquidation bankruptcy because a bank trustee will work with you to liquidate certain items, like collectibles, second cars, second homes, cash, bonds, stocks, and more, to pay off a portion of your debts. Talk to a Chapter 7 bankruptcy lawyer if you have questions about liquidation and your rights.
What is Chapter 13 bankruptcy? Chapter 13 bankruptcy, on the other hand, is generally referred to as reorganization bankruptcy. “This chapter of the Bankruptcy Code provides for adjustment of debts of an individual with regular income. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years,” according to the United States Courts. Work closely with a lawyer to create a Chapter 13 plan. In the plan, you will layout “how much each creditor will get paid, how long the plan will last, the values of the debtor’s property, and more,” Nolo writes. This plan is the crux of your filing.
Who is eligible to file for Chapter 11 bankruptcy? Chapter 11 is the most complicated type of bankruptcy. Like Chapter 13, it entails reorganizing debts and it is sometimes referred to as reorganization bankruptcy. Unlike Chapter 13, only businesses and corporations may apply for Chapter 11 bankruptcy.
In most cases, businesses will remain open as they work with courts to restructure their debts. The courts will have some say in big decisions, however. If the company wishes to stop or expand their operations, sell their assets (other than their main products, goods, or services), change a rental agreement, or end a rental agreement, they must have the court’s approval first.
Several famous corporations have filed for Chapter 11 bankruptcy. Those corporations include K-Mart, United Airlines, and General Motors.
Exactly how does the bankruptcy process work? That depends on who you are and what you are trying to accomplish. U.S. households can file Chapter 13 bankruptcy to set up a formal and digestible repayment plan to pay off their debts. If debts are crippling or insurmountable, Chapter 7 bankruptcy may be a more suitable option. Businesses and corporations wishing to stay open and stay afloat can apply for Chapter 11 bankruptcy.
Of course, the answers to the question, “How does the bankruptcy process work?” are incomplete without considering some of the main motivations that drive people to file for bankruptcy. Unfortunately, in the U.S., it is extraordinarily common to file for bankruptcy thanks to medical expenses and unrelenting medical bills. Some of these medical bills arise after a life-changing injury.
“The total cost of work injuries in 2018 was $170.8 billion. This figure includes wage and productivity losses of $52.4 billion, medical expenses of $35.0 billion, and administrative expenses of $57.6 billion,” according to the National Safety Council (NSC).
While injuries can be excessively costly to employers, they can be even more so to individuals. If you are injured on the job, you may be faced with never-ending medical bills and lost wages. If you are injured on the job, talk to a workers compensation lawyer about your options. They will help you receive all the compensation you are due.
In extreme cases, you may be injured so badly that you will be unable to return to work for months or years at a time… if you are able to return at all. If your injury is life-changing and debilitating, work closely with a disability attorney to fight for damages. Disability will pay a portion of your wages. If your injury is permanent, you may be eligible for additional compensation.
Even with a settlement, medical bills that are literally hundreds of thousands of dollars, medical conditions that require expensive, ongoing care, and injuries that leave you unable to work, it is often not enough. Ultimately, that leaves people with one option: to file for bankruptcy.
How does the bankruptcy process work? It starts with insurmountable debts, like the debt that follows a serious injury.
While medical bills are the most common reason, it is hardly the only reason that drives people to file for bankruptcy. Two other big reasons that people begin to wonder how does the bankruptcy process work are divorce and death.
“Marital dissolutions create a tremendous financial strain on both partners in several ways. First come the legal fees, which can be astronomical in some cases, followed by a division of marital assets, decree of child support, and/or alimony, and finally the ongoing cost of keeping up two separate households after the split,” Investopedia writes. As if that wasn’t enough, some recent divorcees have their wages garnished if they fail to pay child and/or spousal support.
Divorcees can turn to bankruptcy for relief — up to a point. To reiterate, Chapter 7 bankruptcy erases credit card debts, certain bills, and unsecured loans. Having some bills paid off can be tremendously helpful and give filers a fresh start. You will, however, still be responsible for child support payments after filing for bankruptcy.
Another tricky situation that may lead to complications and bankruptcy is an untimely death. Paying for a hospice care facility is extremely expensive as is making funeral arrangements. Many families lack the necessary funds to swing it, especially if their loved one passes away without a will or life insurance plan. That is not an entirely unlikely or uncommon scenario, either. According to the American Association For Retired People (AARP), 60% of Americans do not have a will.
This may leave your family filing for bankruptcy to make ends meet after the sudden death. Another possible reason for filing bankruptcy after the death of a loved one is that he or she was in the process of filing for bankruptcy at the time of their death. If that is the case, a designated relative will take over their Chapter 7 case and see it through to the end.
Being able to loosely answer the question “How does the bankruptcy process work?” isn’t enough. You should also know the ins and outs of the process. It is very important to understand what you shouldn’t do. Here are some important dos and don’ts of filing bankruptcy.
If you need to sell your things, keep a record of it. It is not illegal to sell your things before filing for bankruptcy. It may be a necessity, particularly if you are strapped for cash. If that includes finding the highest prices paid for gold and diamonds or taking part in cash for gold programs, do it. Sell what you need to, but keep a meticulous record of it to disprove any wrongdoing.
Be honest about your income and your debts. Speaking of wrongdoing, do be honest about your debts. Do not lie. If your papers and documents do not reflect the truth, the court will likely throw out your case. This includes purposely omitting details or taking questionable actions, like giving a second car or valuables to relatives and asking for them back later.
Work with a bankruptcy attorney. Bankruptcy law is complicated. Don’t get too confident in knowing the basics of “How does the bankruptcy process work?” You will need to know far more than the basics. Those who choose to represent themselves during bankruptcy filings are rarely successful.
After filing for bankruptcy, large expenses are going to happen. It’s an inevitability of life. Whether your child needs braces from the orthodontist or you or a loved one end up requiring rehab services, there are several life events that will set you back several thousands of dollars. Don’t let that push you into back-to-back bankruptcy filings.
Instead, do what you can to amass savings while on a tight budget. To regularly contribute to a savings account while finances are tight, make tiny cuts from all areas of your budget. Spend slightly less on your food bill, just a fraction less on clothing, and carpool once in a while to save a small amount on fuel. Bundle car insurance and home insurance or renter’s insurance, and sell valuables on EBay, Etsy, or Facebook Marketplace to help make ends meet.
Bankruptcy is a popular solution notwithstanding a global pandemic. With the pandemic still occurring, bankruptcy may be an even more popular option in the coming months and years. “If the economy doesn’t recover and unemployment persists, bankruptcy records may be set in 2021,” Forbes reveals.
For all of us — and now more than ever — it is important to understand all the answers and particulars of the question, “How does the bankruptcy process work?”