Debtor Education and Life After Bankruptcy
In many ways, filing for bankruptcy is a double edged sword.
On one hand, you are able to break free from your overwhelming and oppressive debt, are relieved from nonstop creditor phone calls and threats of wage garnishments, foreclosures, and repossessions.
On the other hand, however, you may end up losing a number of your valuable possessions, and your ability to purchase other large items in the future. But once the dust settles, the decision to file for bankruptcy can leave you with questions of how to move forward with your financial life after the event.
Chapter 7 and Chapter 13 Bankruptcy
Resuming life after a bankruptcy will differ depending on which type of bankruptcy you file. There are two types which are the most common: Chapter 13 and Chapter 7.
Chapter 13 bankruptcy is where you have the option to pay back some of the debt you owe over the course of three to five years.
The length of time you have to pay back the amount will depend on your income. While still having to pay back the debt may not sound like an appealing option if you are unable to afford your payments, it is actually designed to be very helpful by lowering payments. It gives the debtor a longer amount of time to catch up on past due payments.
This is particularly helpful when it comes to the risk of foreclosure. If you are at risk of losing your house, Chapter 13 bankruptcy gives you extra time to catch up on missed payments so your home is not taken away from you.
In cases other than foreclosure, Chapter 13 works as a kind of debt consolidation plan. Once it has been granted, you would make payments just to a trustee, who has been entrusted with the task of dividing your payments among your creditors.
The other more common bankruptcy type is Chapter 7, which wipes out debt altogether, and often results in liquidating your property or possessions to pay debtors. When you think about bankruptcy, this is the version most people think of.
People often assume that if they file for bankruptcy the courts will take everything you own to pay off your debtors, leaving you with nothing. However, this is not the case. The goal of the court in granting a bankruptcy is for you to get out from under your crushing debt and move on with your life, which you would not be able to do if they took everything from you.
If they left you homeless or without a car, clothes, home furnishings, or a laptop you need for work, you would be significantly worse off than you were when your creditors were hounding you.
Will I Lose Everything?
Many of your most important possessions will be considered exempt, meaning that they are exempt from liquidation.
They cannot be sold off to pay for other debts. These items might include your car (up to a certain price limit… you’ll probably have to sell the Maserati), your jewelry (again, up to a certain limit), household appliances, and a portion of your wages.
Your house is a tricky one. There’s a chance you will not get to keep it, but you will get to keep a portion of its equity. This is why consulting with a bankruptcy attorney is so important, they will be able to use your exemptions to your ultimate benefit.
Items that are non-exempt, meaning that your appointed trustee can sell them to distribute the proceeds to creditors, are generally excessive and not mandatory for everyday life.
Non-exempt items might include a second car, a vacation home, a valuable collection like art or stamps, investments and other money, or valuable musical instruments.
How Hard Is The Bankruptcy Process?
While the process is relatively straightforward, its components are each vitally important. Missing even a single element will result in a denial of your claim, or your case being closed or dismissed without a discharge. In that event, you would continue to owe all previous debt, and your home and possessions would once again be at risk.
When you begin filing for Chapter 7 bankruptcy, the first step the courts will insist you complete is pre-filing counseling course, otherwise known as a Credit Counseling Course, and then a post-filing education course called the Debtor Education Course.
The Credit Counseling Course is designed to make sure you truly understand what your rights are as a consumer and debtor, what your repayment options are, and any alternatives you may have to help resolve your debt issues. With your attorney you will determine whether Chapter 13 or Chapter 7 bankruptcy is right for you and your level of debt.
At this session, your appointed counselor assesses the damage of your debt, figures out which creditors are owed what, and essentially how you got into this mess in the first place. All of your financial assets and debts are examined to determine the best way to approach your debt issues.
If you do not complete the Credit Counseling Course within the time allotted and file the certificate, your bankruptcy will not be allowed to move forward.
After your case is filed and you have received a case number, you are required to complete the Debtor Education Course and have the certification of completion you will earn filed with the court through your lawyer. If you use BE Adviser as your provider, they can also file the certificate with you depending on which of their services you select. This step sounds unimportant, but do not underestimate its weight.
Without completing the Debtor Education Course, the courts will close the case without a discharge (without dismissing your debt), and you will go back to where you started: harassing creditor phone calls and all. If you miss the deadline you will have to pay a fee to have the courts and your lawyer reopen the case and start the process again. If you do not complete the course at all you simply will not be able to complete the bankruptcy proceedings except under incredibly rare circumstances.
The Debtor Education Course is a vital part of the bankruptcy procedure because the courts do not want you to have to go through this process again.
They assume, (although this is often not the case), that if you have found yourself in a position in which you have to file for bankruptcy, you probably are not very good at managing your personal finances.
Now, this may be through no fault of your own, as maybe you were just never taught. Or, maybe you suddenly came into money and did not know how to manage it and you squandered it, living higher than your means.
Maybe you simply fell on hard times, lost your job, or incurred an unexpected medical bill that had to take first priority, at the cost of other bills. Whatever the case may be, the court does not want you to have to be in that situation again.
It wants to make sure you have the knowledge, skills, and experience to be able to handle any future financial situations, so it makes financial literacy a mandatory requirement.
In this course, you will learn a number of personal finance basics, such as household budgeting, money management, responsible credit usage, consumer protection laws, and how to handle financial hardships.
This is also meant to discourage people from abusing bankruptcy. The credit score damage is enough to deter most people, but there is always the chance that someone will get carried away with their shopping over and over again, just signing bankruptcy paperwork over and over again to evade negative consequences and repayment.
In short, the goal of this course is to help people find another way to view their money so the necessity of bankruptcy only happens once.
How Do I Move On?
Once you have completed the course, filed the certification of completion, and received your discharge, it is time to start rebuilding. While jumping back into the credit world will be difficult, it will not be impossible to get back on your feet. The first thing you should do is make sure that whatever debt you do still need to pay, like child support, student loans, or tax debt is all taken care of. Put as much of your debt behind you as possible.
Then make sure your current bills are paid on time or early every single month. Do not discount the power of paying your water bill on time! Every single bill and recurring payment you make helps to rebuild the credit you lost.
One way to make sure you are not missing payments accidentally is to sign up for Autopay, which most companies offer. This is an automated system that subtracts your payment from your bank account on the same day each month. This way, you are not at risk for forgetting to pay a bill on time. No checks to write or stamps to buy.
Another factor to consider is the order in which you pay bills. Be sure to pay the essential things first- the water bill, the electric, the rent or mortgage, trash and sewer, gas, and car. Then, reserve enough for monthly necessities that vary in price, like groceries and gas. You know you need to eat and you need to fuel your car, but the amount will change slightly and may increase and decrease based on your monthly use.
Finally, divide up most of what is left over for any remaining creditors. Reserve some every pay period for a savings account, which can pay for emergencies and incidental expenses that could pop up at any time. Many times, large, unexpected expenses can snowball into debt that causes bankruptcy in the first place, so it is wise to prepare for the unexpected.
When you are ready and feel that you are able to handle things like credit cards again, ease in by asking a parent, spouse, or other close friend or family member to add you to one of their credit cards.
That way, you have someone to hold you accountable for your spending, and their credit will reflect well on you as you rebuild your score. Again, make sure you are paying your end of things as well in this situation, as it will help to build your credit and help you learn to manage your credit as well.
Next, you may need to purchase a car. In many cases, you will be allowed to keep the car you had as your primary transportation during the bankruptcy process, as long as it is within a financial limit (AKA not a Maserati).
However, if your car had been repossessed or if you just decided to sell your old wheels to pay off other debts, you may find it difficult securing credit for a new car, but you will need some way to get to work. If you are not able to pay cash for a car, there is still hope.
It actually is probably better not to pay cash, because this is another opportunity to build your credit, provided you can find someone who is willing to cosign for your loan. A close family member or friend with solid credit is a great resource if you can talk them in to cosigning for your vehicle. They assure the doubtful creditor that they will keep an eye on you and make sure you are paying your car payments in full and on time every month.
If you do not pay on time, your cosigner will be responsible for making up the difference, and they probably would not be very happy with you. When you have a cosigner, it becomes exponentially more important for you to pay your debts on time, because it is no longer just a distant creditor to whom you owe money.
Now you also have a personal connection to your creditor, so make sure to be vigilant with payments.
Once you have become skilled and accustomed to paying bills on time and building up savings and your credit, all you can do at that point is wait. Bankruptcy will become last impactful on your credit over time. Your more recent credit history is weighted more heavily than your past credit history, so make sure that you keep a stellar record moving forward. You want to make sure all of your payments made to creditors are made on time or early. This will have the biggest effect on boosting your credit score moving forward.
If you keep up consistent payments, your credit score will improve more significantly. Waiting is perhaps the most difficult part, but it is designed to ensure that you have become completely accustomed to using and building credit responsibly and effectively, so you never are faced with the need for bankruptcy again.