What to Do Before Filing for Bankruptcy

Bankruptcy is the last resort for people who are deep in debt and see no way to pay their bills.

Before filing for bankruptcy, some alternatives are worth exploring. They are less costly than liquidation and likely to do less damage to your credit record.

For example, find out if your creditors are willing to negotiate. Rather than wait for a bankruptcy settlement—and risk getting nothing at all—some creditors will agree to accept reduced payments over a more extended period.

In the case of a home mortgage, perhaps you can call your loan servicer to see what options may be available to you. 

Some lenders offer forbearance (postponing payments for a while), repayment plans (such as smaller payments stretched over a longer period), or loan modification programs (which might, for example, lower your interest rate for the remainder of the loan).

Even The Internal Revenue Service is often willing to negotiate. If you owe taxes, you may be eligible for an offer in compromise, in which the IRS will agree to accept a lower amount, the IRS also offers payment plans, allowing eligible taxpayers to pay what they owe over time.

If you’ve decided to file for bankruptcy, your first step should usually consult a law firm While it is possible to present without one, “seeking the advice of a qualified lawyer is strongly recommended because bankruptcy has long-term financial and legal outcomes.

Before you file, you’ll be required to attend a counseling session with a credit counseling organization approved by the Department of Justice’s U.S. Trustee Program. The counselor should evaluate your personal financial situation, describe the alternatives to bankruptcy, and help you devise a budget plan. 

Counseling is free if you can’t afford to pay; otherwise, it should cost about $50, according to the Federal Trade Commission.

If you still wish to proceed, our lawyer can advise you on which type of bankruptcy is more appropriate for your situation.

It is great once you are with debts to know the rules for debt collection. Learn What the Fair Debt Collection Practices Act prohibits.

Valencia Law Group PLLC can advise you on how to file a case if you are is considered. 

Stay Alert, in your effort to regain your creditworthiness, take precautions against ads that offer quick solutions that can result in scam or fraud.

Types of Personal Bankruptcy

In the case of individuals, as opposed to businesses, there are two common forms of bankruptcy: Chapter 7 and Chapter 13. Here is a brief description of how each type works:

Chapter 7. This type of bankruptcy essentially liquidates your assets to pay your creditors. Some assets—typically including part of the equity in your home and automobile, personal items, clothing, tools needed for your employment, pensions, Social Security, and any other public benefits—are exempt, meaning you get to keep them.

But your remaining, non-exempt assets will be sold off by a trustee appointed by the bankruptcy court and the proceeds will then be distributed to your creditors. Non-exempt assets may include property (other than your primary residence), recreational vehicles, boats, a second car or truck, collectibles, or other valuable items, bank accounts, and investment accounts.

At the end of the process, certain debts, like student loans, child support, and taxes, cannot be discharged but also other debts will be released, and you will no longer be under any obligation to repay them. However, Chapter 7 is generally chosen by individuals with lower income and few assets. Your eligibility for it is also subject to a means test, as explained below.

Chapter 13. In this type of bankruptcy, you are allowed to retain your assets but must agree to repay your debts over a specified period of three to five years. The trustee collects your payments and distributes them to creditors. Chapter 13 bankruptcy is normally chosen by people who want to keep their non-exempt property intact or buy time against foreclosures or property seizures.

The Means Test for Chapter 7

Whether to file for Chapter 7 or Chapter 13 is not your decision alone. The courts also impose a means test to determine whether you are eligible for Chapter 7. The means test first compares your average income over the previous six months with the median income for a household of your size in your state; if you earn less than the median, you should be eligible for Chapter 7.

Contact a skilled Bankruptcy Lawyer at Valencia Law Group at 505-871-5107 with any questions!

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