Bankruptcy is a legal proceeding that protects a person or business from outstanding debts. It helps assure a fresh start since financial obligations are partially or fully written off. The annual bankruptcy filings reached 413, 616 in 2021 alone as per statistics released by the Administrative Office of the US Courts. The United States Bankruptcy Code offers six different types: Chapters 7,9,11,12,13 and 15 that apply to unique entities and circumstances. These are helpful when you are drowning in debt and feeling overwhelmed and chaotic.
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The process is usually governed by the Federal Rules of Bankruptcy Procedure and the rules of the local court. Start with choosing the right attorney, being honest about your monetary status and avoiding credit cards at least 90 days before filing. You also need to know a few common mistakes that can impair the process. Here’s a look.
1. Not Including All Creditors
Disclose all assets and debts. You are also required by law to list every creditor instead of keeping a few ‘special’ ones away from the case. This holds true even if you wish to repay them at a later date. A debt with co-signers should also be included. Else, the discharge can be denied later under dishonest or non-transparent grounds.
2. Non-Compliance with Bankruptcy Code
There are a few specific needs that must be met before filing bankruptcy. For instance, avoid draining your retirement account and be brutally honest about your income and assets. Know that your credit score will be affected which might make it tough to get a loan anytime soon. Try to pay a few of your bills, change your contact number and gather all the papers that you may need for a smooth process.
3. Filing Wrong Bankruptcy
The assets of a business are liquidated to pay its creditors in Chapter 7 Bankruptcy while the company continues to operate under court-appointed trustees to emerge as a viable business in Chapter 11 Bankruptcy. It is necessary to pick the right category to fit your situation to avoid repaying a chunk of the debt on your own.
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4. Not Hiring a Lawyer
The number of business bankruptcies was expected to rise 196% in 2020 alone due to the pandemic and the industry revenue might have increased by 42.1% in the same year. It is thus necessary to be aware of a few expert attorneys in case you wish to file a bankruptcy too. Else, you may end up making costly mistakes and waste plenty of time.
5. Delaying Bankruptcy
Waiting too long can lead to a snowball effect. You might not be able to keep your assets when it is too late and end up losing it. So, start exploring bankruptcy options with the help of experts as soon as you are unable to keep up with the debt payments anymore. This way your properties can be protected from being seized and liquidated.
6. Credit Card Run Up
Discontinue using cards when you realize you will not be able to repay. Large consumer debts incurred for luxury goods worth more than $500 from a single creditor within the next 90 days of filing are non-dischargeable. They might not be wiped out by bankruptcy. Try not to impair the process of starting all over again by overusing your credit cards.
7. Filing Multiple Times
There is no limit to how many times you can file bankruptcy yet know that doing so more than once can increase the damage to your credit. Chapter 13 can appear on the report for the next 7 years and Chapter 7 can stay for 10 years. In fact, the court might dismiss your case if you file too soon after the last bankruptcy case.
The ‘collection case’ will continue even if you have filed for bankruptcy. So never miss out on appearing for the court proceedings. Lastly, never try to take a loan against your real estate to reduce equity. Keeping these tips in mind can avoid the denial of your bankruptcy case or imprisonment.