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5 Minute ReadTopic: debt
You did everything you could to avoid it. You cut back on spending. You sold stuff to make payments. You’ve been eating peanut butter and jelly. But even with all the work, you’ve come to one painful conclusion—you may need to file bankruptcy.
There are some things you need to know before you take that first step. We want to help you find those answers.
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What Is Bankruptcy?
When you “file for bankruptcy,” you’re telling the court that you cannot pay your debts. It’s a process set up through federal laws. It cancels many of your debts so you can get a fresh start. However, it also allows creditors (people you owe money to) to get a share of any money the courts require you to pack back.
When you file for bankruptcy, creditors have to stop any effort to collect money from you, at least temporarily. Most creditors can’t write, call or sue you after you’ve filed. Bankruptcy can also stop foreclosure on your home, repossession of property, or garnishment of your wages.
What Kinds of Bankruptcy Should I Know About?
There are two main types of bankruptcy for consumers. You’ve probably heard of them:
- Chapter 13 means the court approves a plan for you to repay some or all of your debts over three to five years. You get to keep your assets (stuff you own) and you’re given time to bring your mortgage up to date, which eases the pressure a little. You agree to a monthly payment plan and must follow a strict budget monitored by the court. This kind of bankruptcy stays on your credit report for seven years.
- Chapter 7 means the court sells all your assets (with some exemptions) so you can pay back as much debt as possible. The debt not paid off is erased. You could lose your home (or the equity you’ve put into it) and your car in the process, depending on what the court decides. You can only file Chapter 7 bankruptcy if your income is low enough and your debts are high enough. It stays on your credit report for ten years.
You’ve probably heard of other types of bankruptcy, like Chapter 11. It’s typically reserved for business. You may also hear of Chapter 12 bankruptcy, which is for farmers and fishermen.
For specific information about bankruptcy laws in your area, visit the United States Courts website. There you’ll find information on the process and where to find help in your area. There is a bankruptcy court for each judicial district in the US—90 districts in all.
What Should I Do Before I File for Bankruptcy?
Filing for bankruptcy is a big deal, so you don’t want go in blind. Here are some things you need to do before you take any action:
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- Know the limits. Bankruptcy isn’t a get-out-of-jail-free card. You may still owe some debt like student loans and back taxes. You’ll still have to pay child support and/or alimony. And filing for bankruptcy involves its own costs, and those don’t get waived off either.
- Get paperwork organized. Make a list of all debts, from your mortgage to student loans to child support. For each of those debts, find paperwork to verify the amounts. If you talk to anyone (lawyer or financial coach), you’ll need this information.
- Look at options. Before you file, try your best to pay off your debt. Get on a bare-bones budget. Talk with creditors about lowering interest rates or getting better terms. Move to a smaller place. Get an extra job to pay the bills. You get the idea.
- Try financial coaching. A financial coach can give you a different, unbiased perspective on your financial situation. They can talk with you about alternatives to bankruptcy and create a customized plan to get out of the red. And they can give you encouragement and that extra kick in the right direction!
- Get professional help. If you’ve done everything you can and still can’t get your head above water, bankruptcy may be your only option. Filing is complicated and involves lots of paperwork and the potential for mistakes. Working with a pro is your best option for walking through the process.
How Can Ramsey Solutions Help You?
If your family decides to file bankruptcy, we’ll be here to help you during the process and give you the tools to restore your hope after your bankruptcy is discharged. We’ll never get angry with someone for filing bankruptcy. It’s a difficult, emotional situation. We get that.
If you haven’t filed yet, we have coaches available to meet with you and work with you to find a better option than filing if at all possible.
Our ultimate goal is to help you find financial peace and change your family tree. Bankruptcy is a setback, sure. But your situation, no matter how bad, is never hopeless.
Let us help.