Since the start of the coronavirus pandemic, personal bankruptcy filings have decreased significantly; however, analysts predict that filing numbers will increase this year as a result of rising interest rates and fading government support.
“I’ve had more calls in the last few weeks than the previous six months,” said Charles Juntikka, a bankruptcy law expert with a practice in New York.
Head of Chicago-based Lakelaw and bankruptcy attorney David Leibowitz said that his company has “already seen filings in the Chicago area pick up by about 25% in the last two months.”
The frequency of bankruptcy filings has decreased as a result of the numerous government stimulus programs, improved tax credits, and safeguards against evictions and loan foreclosures implemented over the past two years.
However, Juntikka argues that neighborhood lockdowns and general Covid gloom may also play a role. “It’s hard for people to face the fact that they need to file,” he said. “It takes emotional energy, and they feel guilty about it.
“For every person I help, there are four or five out there who are miserable.”
For financially constrained Americans, declaring bankruptcy may feel like the end of the road, but it also represents a fresh start and a chance to escape a hole that many people believe is getting deeper.
It’s not a simple process. A bankruptcy filing affects your ability to receive a loan or mortgage and stays on your credit report for 10 years.
“If you can pay off your debts outside bankruptcy, you should,” Leibowitz, a former chairman of the American Bankruptcy Institute’s consumer bankruptcy committee, made this statement. “However, if your wages are being garnished, your car has been seized and you’re being hounded by collection agencies, bankruptcy may be imperative.”
Your first choice is whether to employ a lawyer to assist you if you feel bankruptcy is your best option. You can file a court case on your own, but mistakes are expensive.
Which section of the code ought you to file under? What documents must you fill out? What errors must you prevent? Although you might save money by filing on your own, you risk lose much more in the long run because bankruptcy law is complicated.
“People don’t do their own dental work,” Juntikka said. “You need to consult a lawyer.”
Steps to take
There are several phases and formalities that must be followed during the bankruptcy process. Depending on your situation, you can file for several types of bankruptcy.
Most, but not all, personal debts can be discharged in Chapter 7 bankruptcy files, which make up the vast majority of personal filings. Among the debts that petitioners might still owe include college loans, tax debts, and alimony. Although there are some exceptions, such as retirement account balances, the majority of your property is liable to seizure and auction.
You must pass a means test in order to qualify for Chapter 7. In essence, your salary needs to be lower than the state’s median income in order to qualify. If not, you must file a bankruptcy under Chapter 13 of the statute.
In that case, you might be able to keep some of your personal property and some of your unsecured obligations might be forgiven, but essentially a debt payback plan is established, usually lasting five years.
The individual actions you must take to file for bankruptcy are listed below:
- Collect all the necessary paperwork, such as tax returns, pay stubs, bank, brokerage, and retirement account statements, as well as appraisals of any real estate or other assets you possess, vehicle registrations, and any other records relating to obligations or property you own.
- Before and after filing for bankruptcy, every person who files is required to attend a credit counseling course. If you are unable to pay the fee—which is normally less than $50—it may be waived.
- Get the relevant bankruptcy forms filled out and printed, pay the filing fee ($338 for a Chapter 7 filing in federal court), file the forms with the court, and mail the required paperwork to your chosen bankruptcy trustee.
- Attend the creditors’ meeting with your trustee, which will probably be held online. It occurs around a month after your case is initially filed.
These are all necessary processes, and having legal representation can help guarantee you don’t make any mistakes.
What you should not do
The largest error people make when filing for bankruptcy is attempting to manipulate the system. In a bankruptcy, all of your assets could be taken, and neglecting to disclose all of them could result in criminal prosecution.
Ask tennis player Boris Becker, who faces prison time in the UK for asset concealment. Before filing, avoid giving away property to friends or relatives. It will be snatched away.
Additionally, avoid using all of your credit options prior to filing. It won’t be well received by the court. Never utilize retirement account funds to settle debt.
“Truth and transparency are critical to the bankruptcy process,” said Leibowitz. “Honest debtors get a fresh start, while dishonest ones can potentially go to jail.”
How to proceed after bankruptcy
Although filing for bankruptcy may seem like the final failure, there is still hope. In order to restore order to their life, Leibowitz counsels people to adopt the following actions:
- Create a spending plan you can follow.
- Create a savings account and deposit one month’s worth of salary there to prepare for unforeseen needs.
- Get a secured credit card, and only use it for monthly costs that you can repay.
- Rent and bills should be paid promptly.
- Regularly check your credit record to ensure that no obligations that were wiped in bankruptcy are still showing as unpaid.
If you stick to a disciplined plan, you can swiftly raise your credit score and, in as little as three years, become qualified for a mortgage through the Federal Housing Administration.
“There is such a stigma associated with bankruptcy,” Leibowitz said. “But the idea of rehabilitation and forgiveness is baked into our constitution.”
“Bankruptcy can give people a second chance.”