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When I was growing up my favorite board game was Monopoly. I would beg my parents to play and they would occasionally reluctantly agree to two and a half hours of dice rolling/property buying fun.
In Monopoly, bankruptcy was the end of the game, when you run out of money and properties. Real life, however, doesn't feel anything like a game. In fact, it is quite the opposite.
Bankruptcy is an unfortunate situation that people find themselves in for a myriad of reasons. From a major life change to getting swindled, bankruptcy can happen to the best of us. Thus, it is important to look at it from a factual standpoint and understand the basics of bankruptcy, including what it is, how it works, and what it means for you.
What is Bankruptcy?
According to NOLO, a legal encyclopedia, “Bankruptcy is a process that allows consumers and businesses to repay some or all of their debts under the protection of the federal bankruptcy court. For the most part, bankruptcies can be divided into two types: liquidation and reorganization.”
This means that you can declare debts and work with the courts to structure a way to repay all or some of them. It is important to note, however, that not all debt can be declared under bankruptcy. Student loans, taxes, alimony, and child support are probably the most notable of debts that might not be forgiven by the bankruptcy process.
Bottom line, bankruptcy allows you to pay off your creditors while being protected by the Government during your proceeding.
How Do I Know If I Am Bankrupt?
There is no clear answer here.
Filing for bankruptcy can be a tough personal decision. It can cause a lot of emotional turmoil and can affect your financials for a long time. Your credit score, ability to get loans, and complete other financial dealings can all be impacted.
Before declaring bankruptcy, verify that you are in a place where there is no other means to get out from under your debt.
Once you file for bankruptcy, you cannot turn back. LegalZoom lists some questions to help you decide if you are in a dangerous situation that requires filing for bankruptcy.
- Do you only make minimum payments on your credit cards?
- Are bill collectors calling you?
- Does the thought of sorting out your finances make you feel scared or out of control?
- Do you use credit cards to pay for necessities?
- Are you considering debt consolidation?
- Are you unsure how much you actually owe?
You are going to have to do some number crunching and soul searching to figure out if this is right for you, so deliberate carefully. The only time the decision will be taken out of your hands is if creditors ask for you to be declared bankrupt.
Types of Bankruptcy
There are four types of bankruptcy: chapter 7, chapter 13, chapter 11, and chapter 12. No, this is not a novel where you only have to read those chapters. These are simply the legal names for the different kinds. Below is a brief overview of each kind.
In chapter 7, both individuals and business can file. In this chapter, you can have property seized and sold to pay off your debts except for furniture in your home, your car, and your clothes. In addition, “In a Chapter 7 bankruptcy proceeding, you (the debtor) have to make a choice between allowing the creditor to repossess the property that secures the debt, continuing to make payments on your debt to the creditor, or paying the creditor a sum equal to the replacement value of the property that secures the debt,” according to Findlaw. This means that you have options, which is always good in this situation. This can take up to 3 to 6 months.
Also important to note about chapter 7 is that you have to show you do not have enough money, minus certain expenses, to fully repay a chapter 7 repayment plan. In chapter 7, some debts are not forgivable such as alimony, taxes due, and child support. See all debts that you cannot get rid of when filing here.
Only people with a reliable income are allowed to file for this chapter of bankruptcy. Findlaw sums this up best by stating, “In Chapter 13 bankruptcy in federal court, you must work with the court to come up with a repayment plan, and stick with the plan over the next three to five years. The amount you will need to pay is based upon your income, how much debt you owe, and how much the creditors of your unsecured loans (debts not that are not guaranteed by collateral) would have received if you had filed under Chapter 7 instead of Chapter 13.” This bankruptcy means you are making payments for a good amount of time-based on several factors.
In order to file for this, you must show that your debts are under the limit for filing. As of 2016 and through 2019, those limits are as follows.
Unsecured debt limit: $394,725
Secured debt limit: $1,184,200
In chapter 13, you may repay debts without having the property they are associated with seized. You may even be able to put past due payments into your payment plan to pay off over a number of years.
Chapter 11 is used for businesses who are struggling and need to get their financials in order. In some cases, an individual may file for this for larger debts on non-exempt property like several homes. But this is a much more costly way to go. Chapter 12 is similar to chapter 13, but 80% of the debt must be coming from a family farm.
How Does Filing for Bankruptcy Affect You?
Filing affects you in three ways: financially, logistically, and emotionally.
Financially, it will make you feel less burdened and may give you a sense of relief that your debt is under control. That is of course if it did not cost you your home or some other important asset you treasured. However, you may find yourself with a tight budget to make payments on your plan to pay back creditors.
Logistically, it is going to make it very hard for you to do much in the way of purchasing or using your credit to make financial decisions. Bankruptcy and debts from it stay on your credit score for seven years. This means you will not be able to get a credit card or possibly approved for a mortgage for up to 5 to seven years. As you work to make payments and improve your credit score, things may get better. If you are able to get a credit card or mortgage, your interest rates can be much higher. It is important to note, that your employment now and in the future, by law, cannot be affected because of a bankruptcy filing.
Emotionally, bankruptcy can make you feel like a wreck. You might have low self-esteem, be embarrassed, ashamed, guilty, and perhaps more raw emotions. These are all normal emotions to experience.
While negative emotions are common, you may want to put it in perspective. According to Independent, below are the most common reasons people in the United States file for bankruptcy:
— Medical expenses
— Job loss
— Poor use of credit: credit cards, unaffordable mortgages
— Divorce or separation
— Uninsured expenses: theft, accidents, natural disasters
Try to look at the big picture of why you filed. Whether it was due to your own actions or circumstances out of your control, take the opportunity to move forward and improve your life. Do not let bankruptcy define you.
How Do I File for Bankruptcy?
Unlike this hilarious clip from The Office, filing for bankruptcy is not a simple process.
Monopoly may give us an idea what bankruptcy means in a very general sense. But, it cannot teach us the complexity that is bankruptcy. From why it happens to the different types, to how it affects us, bankruptcy is a complex beast. The information in this article is meant to make it more understandable so you can make an informed decision.
Hopefully, you have gained a basic understanding of bankruptcy and “passed go”. Unfortunately, unlike Monopoly, I won't be giving you $200.