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“What Happens If I Apply For Bankruptcy?”

pen, gavel and petition to file for bankruptcyWhile this is a legitimate question, a better question would be to first ask yourself, “should I file for bankruptcy”? Most people choose what’s called a chapter 7 bankruptcy or liquidation bankruptcy. This will discharge virtually all your unsecured debts but comes with a high price tag.

What a bankruptcy costs

I have seen attorneys advertising bankruptcies for less than $500. However, it’s important to remember the old adage that “you get what your pay for”. In other words, a $500 bankruptcy may not get you the same attention or service as one costing $1,000.

How long does a bankruptcy take?

It generally takes from six to 12 months to get through a bankruptcy, depending on where you live.

DIY bankruptcy

If you don’t own a real estate, you could probably handle the bankruptcy yourself. If you do have a house, you will need an attorney. He or she will file with the bankruptcy court in your district..

Your assets and debts

Shortly after you file for bankruptcy, you will be required to submit a report listing all of your assets and debts. The bankruptcy judge or trustee will review all this information and give it a “means” test to make sure you qualify for a chapter 7. If you fail this test, your bankruptcy will be kicked up to a Chapter 13, which is something entirely different.

Forced credit counseling

You will also be required to take an approved credit-counseling course before you complete the bankruptcy. With a chapter 7 bankruptcy, you will also be required to meet with your creditors. However, very few lenders will actually send representatives to that meeting, so it will probably be just you, your attorney and the bankruptcy judge or trustee.

The debts that will be discharged

A chapter 7 bankruptcy will only discharge unsecured debts and not even all of them. For example, you cannot discharge child or alimony debts, past-due taxes, debts created through fraud and student loan debts. It will discharge credit card debts, medical loans, personal loans and lines of credit. It will also not discharge secured debts such as your mortgage and auto loans.

What you can keep

You may remember from an earlier paragraph that a chapter 7 bankruptcy is called a liquidation bankruptcy as its purpose is to liquidate your assets to pay your creditors. However, you are allowed to keep certain of your assets, including the equity in your house (up to a certain limit), your motor vehicles (again up to a specified limit), your household goods and furnishings, your wedding ring, jewelry (probably up to $500 worth) and the tools of your trade.

The effects of a chapter 7 bankruptcy

As I mentioned in an earlier paragraph, a chapter 7 bankruptcy does come with a high price tag. It will reduce your credit score by an estimated 100 points so you will have a hard time getting any new credit for two to three years. A bankruptcy stays in your credit files for either or seven or 10 years (depending on the individual credit reporting bureau). Plus it’s a public record that will stay with you forever. Any time anyone pulls your public record it will see that you had a bankruptcy. This could be anyone from the federal government to a prospective employer or even a prospective spouse, This means it would pay to consider the issue very carefully before you file for bankruptcy as it will definitely have long-term consequences.

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