Highlights
Am I a Failure if I File Bankruptcy?
We hear this a lot. It's sad every time we hear it because it's just not true, and this lie causes people to suffer longer and keeps them from building a better life. Let me explain why this is the exact opposite of the truth.
Nobody plans on filing bankruptcy in the same way that nobody plans on getting divorced. But people get divorced and file bankruptcy all the time, and they do so to get out of bad situations and to create a better future for themselves. In both of these instances-divorce and bankruptcy-it's not about your past, or what got you there, it's about your future. The only people focusing on your past are the same ones trying to hold you back and keep you small, or at best they just don't know what they're talking about.
Understanding this, we can see that bankruptcy is just like divorce, because they're both a step toward building a better life for yourself and your family. This means that not filing bankruptcy and continuing to suffer in debt is a choice to do nothing.
So ask yourself: Does a failure confront the issue and make hard choices that will make their life better or does a failure do nothing and choose to continue suffering?
Remember, bankruptcy isn't about your past, it's about your future. You can have a better, more financially vibrant future. All you have to do is have the courage to take the first step and choose the life you want.
I'm Scared Bankruptcy Will Ruin My Credit...and My Future
Let me ask you a question. What do you think being in overwhelming debt does to your credit?
We typically think about credit score when we think about credit. Your credit score is primarily a reflection of your payment history, credit utilization, and age of credit.
That's not the whole picture though.
The other important piece of your credit that's not reflected in your credit score, but that lenders look really closely at, is your debt-to-income ratio.
All of these pieces are important factors in determining your credit worthiness. If you're struggling with debt that you can't get rid of, then your credit is inevitably taking a hit.
Maybe your like many of the folks we work with who have good payment history because they manage to make their minimum payments each month. But by the end of the month they have no money left over and they're forced to use their credit cards again, essentially undoing their payments by coming full circle in the monthly debt cycle.
Their credit may not be in the 400s, in fact their score may very well be in the 600s, but unless they find a way to get out of debt they've peaked because they're credit utilization is likely maxed out at or near one-hundred percent. And their debt-to-income ratio is almost certainly going to keep them from qualifying for a mortgage or a loan with good interest. So they're stuck with fair credit for as long as they remain in debt.
So how does bankruptcy help you if you're in this situation? Of course, as you would expect your credit is going to take a hit if you're in this situation. But here's the whole truth...the part that folks leave out when all they do is focus on the negative. The other thing that happens when you file bankruptcy is that your credit utilization and your debt-to-income ratio get reset. So while your credit takes an initial hit, over time it'll turn out that you're actually in a much better situation than if you hadn't filed.
In fact, did you know that you can qualify for an FHA or VA mortgage two years after your bankruptcy discharge, and you can qualify for a USDA mortgage in three years and a conventional mortgage in four years.
Here's the truth, being in debt that you can't get out of is bad for your credit just like filing bankruptcy is bad for your credit. The way to improve your credit in either situation is to eliminate it by putting it further and further into your past. If you're struggling with debt now and you know you're still going to be struggling with the same debt in three years, then isn't bankruptcy better for you and your credit?
Bankruptcy is a tool to get out of debt, therefore bankruptcy is a way to fix your credit. Not immediately, of course, but it sets you up for a future with better credit. That's the whole point. Bankruptcy truly gives you a fresh start.
Key Benefits of Filing Chapter 7 Bankruptcy
The biggest benefit we see for our clients is the relief they get in knowing that they're no longer in debt. That's huge. But here is a quick highlight of some of the top perks of Chapter 7 bankruptcy.
Immediate Relief from Creditors Through Automatic Stay
As soon as you submit your bankruptcy filing, the automatic stay goes into effect and prevents anyone from attempting to collect a debt from you. Here's how the automatic stay can help:
Debt collectors must stop contacting you: The automatic stay stops debt collectors from calling you, sending letters, or engaging in any collection actions.
Garnishments are put on hold: If your bank accounts are being garnished, the automatic stay puts a stop to it as soon as your bankruptcy case is filed.
Foreclosures and evictions are halted: If you are facing foreclosure or eviction, the automatic stay can temporarily delay these proceedings, allowing you to explore options such as loan modifications or alternative housing arrangements.
Repossessions are put on hold: If your car or other property is being repossessed, the automatic stay can provide a temporary reprieve, giving you time to negotiate with the lender or explore other options to retain or replace the property.
You Can Protect Your Car and Home
This is a big one. A lot of folks are scared of bankruptcy because they think they're going to lose everything if they file. That's not true. You're allowed to keep everything we can protect using bankruptcy exemptions, and lucky for us here in Texas because our state exemptions are some of the best in the country at protecting property. That means that we file very few cases where we have nonexempt property for the bankruptcy trustee to administer.
Car exemption: You're allowed to exempt up to one car per licensed driver in your household. There are some monetary limits here but they almost never come into play in practice. We can discuss this more during a consult if your concerned about it.
Home exemption: I feel like our homestead exemption is famous. We're allowed to protect the entire value of your primary residence if you purchased your home more than 1,215 days ago, and we can protect up to $189,050 of equity if you purchased your home fewer than 1215 days ago.
No Repayment Plan
One of the key advantages of filing for Chapter 7 bankruptcy is that it doesn't require a repayment plan, unlike a Chapter 13 bankruptcy that calculates your "disposable income" and has you pay that amount through the Chapter 13 payment plan. This makes Chapter 7 bankruptcy one of the cheapest ways to get out of debt and move on to your next chapter.
Fast Process -> Usually Only 4 Months
This is one of my favorite features of Chapter 7 bankruptcy. Most of our Chapter 7 clients receive a bankruptcy discharge in about four months after we file their case. I love this because people are so fed up with their debt and the stress that comes with it, and they're ready for a real change. Well, Chapter 7 is the answer they're looking for because it's one of the fastest ways to get out of debt. Imagine being out of debt in four months.
Get Out of Debt
We all know this one, but it's significant so it's worth listing among the top benefits. Chapter 7 allows you to get rid of most, if not all, of your unsecured debt without needing to make another payment on them. Most commonly this means eliminating credit card debt and debt from personal loans nd medical bills.
It should be said that there are certain types of debt can't be discharged, like certain tax debts, criminal penalties, and student loan debts. You should speak with our Austin bankruptcy lawyer to discuss your financial situation and learn which of your debts we can have discharged with Chapter 7 bankruptcy.
A Fresh Start & Financial Security
Imagine a future without being in debt. In this future you can keep the money you're currently paying to your creditors. You can use it to provide for your family and plan for your future. You're not stressed out about minimum payments and interest rates. You don't lay awake at night wondering how long it will take for your creditors to sue you if you don't pay them.
That's what what it means to get a fresh start and embrace financial security. I know it probably doesn't feel like it right now, but that future is possible and bankruptcy can help you get there.
How Much Debt is Enough for Bankruptcy?
The answer to this question is different for everyone and it depends on several factors, such as your income, employment status and ability to repay, risk tolerance, and stress tolerance. Our short answer to this question is that bankruptcy should be a real consideration if you can't reasonably repay your debts in the next three to five years. If you're interested in reading more about this topic then check our our full-length blog where we go into more detail in answering this question.
Do I Qualify for Chapter 7 Bankruptcy?
I always tell folks that Chapter 7 bankruptcy is what everyone is scared of when they think of bankruptcy (because you could lose certain nonexempt assets that can't be protected by state or federal exemptions), but it's also the type of bankruptcy that everyone wants to file when it comes down to it. However, bankruptcy law tells us that if you can afford to repay some of your creditors then you should file a Chapter 13 bankruptcy instead. The means test is the primary way for determining whether you qualify to file a Chapter 7 bankruptcy, but it's not the only way.
Means Test
First things first, if your income is below the median income in your state for a family of your size then you're exempt from the means test. This represents the majority of folks who file Chapter 7 bankruptcy. If your income is above the median income then you may still qualify for a Chapter 7 bankruptcy if you can pass the means test.
The means test considers a variety of factors, such as your income for the six months before the month you file, certain IRS standards for your area, monthly payments for childcare costs, medical expenses, retirement deductions, court ordered payments (i.e. child support), total payments for secured debt, and the total amount of your debt. It's fairly complex, and if you're in a situation where your ability to file a Chapter 7 hinges on whether you can pass the means test then you should speak with your Austin bankruptcy attorney.
Non-Consumer Debt
If the majority of your debt is non-consumer debt, meaning it's not debt you took out to provide for you or your family or household, then you're exempt from the means test. We typically see this most frequently for folks who took on debt for their small business.
Now, this doesn't create a total free pass to file Chapter 7 bankruptcy. We still have to look at your disposable income to see if you have the ability to repay in a Chapter 13 bankruptcy. But because we avoid the means test, your income can be much higher and you can have expenses relative to your income so that you little to no disposable income to be paid into a Chapter 13 repayment plan.
Conclusion
Filing bankruptcy isn't about what has happened in your past, and the messages that exists that tries shaming you for even thinking of file bankruptcy is harmful, misleading, and only meant to hold you back.
You're capable of taking charge of your life. Even if you feel...even if you know that you can't get out of debt, you can. Chapter 7 bankruptcy is a powerful tool with a lot of benefits for you and your future. Nothing will change until you take the first step, and now is the right time. Call us at (512) 379-8080 or book online to schedule your free consultation to speak to our Austin bankruptcy lawyer.
Frequently Asked Questions
How Long Does Chapter 7 Bankruptcy Stay on My Credit Report?
Chapter 7 bankruptcy typically stays on a credit report for 10 years. While some folks experience in an initial negative impact on credit score, you can begin rebuilding your credit immediately after receiving a bankruptcy discharge.
Can I File for Chapter 7 Bankruptcy More Than Once?
The bankruptcy code allows you to file for Chapter 7 bankruptcy more than once, but certain conditions must be met.
If your previous Chapter 7 filing resulted in a discharge, you must wait eight years before filing for Chapter 7 bankruptcy again. However, you can file a Chapter 13 bankruptcy four years after your previous Chapter 7 discharge.
If your previous Chapter 7 didn't result in a bankruptcy discharge then you can file again before eight years, but the automatic stay may be shortened or completely eliminated depending on when you filed last. You should speak with an Austin bankruptcy lawyer if you find yourself in this situation.
What Are the Alternatives to Filing for Chapter 7 Bankruptcy?
The alternatives to bankruptcy fall into two categories. Category 1 is the type of "get out of debt" advice that works for folks with manageable debt. You can check out our blog here that goes into more detail about this type of advice.
The second category of alternatives to bankruptcy is for folks who's debt isn't manageable and they feel like they can't get out of debt. The alternatives to bankruptcy that exist for these folks is everything that falls under the umbrella term "debt relief," which includes bankruptcy. These alternative debt relief options include debt settlement, debt consolidation, credit counseling, debt management plans. You can check out our blog here that explores each of these options and their pros and cons in depth.
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