Will filing for bankruptcy hurt my credit score?
It is important to understand that a bankruptcy filing will always be considered a very negative event for your credit score. The impact that it will have on your score will depend on your entire credit profile. For example, an individual with an excellent credit score would expect a significant drop in their credit score. However, someone with many negatives items already listed on their credit report might only see a modest drop in their credit score.
Additionally, someone with poor credit must consider the following: if a bankruptcy petition is not filed on their behalf, their credit score will not rebound unless that individual is able to raise substantial capital to repay credit card debt. Even if credit card debt is repaid or judgments are satisfied, those negative marks will remain on a credit score for many years. While a bankruptcy filing will remain on a credit application for many years, credit companies will know that an individual does not have any debt from prior to the bankruptcy filing, and the credit score can rise.
How long will a bankruptcy filing last on my credit score?
The amount of time that a bankruptcy filing will last on your credit score depends on the type of bankruptcy petition that you file. A Chapter 7 bankruptcy will stay on your credit report for 10 years, and a Chapter 13 bankruptcy filing will remain for 7 years. The difference between these two types of bankruptcy chapters is that a Chapter 7 is essentially a complete forgiveness of all unsecured debt. Meanwhile, Chapter 13 only permits a discharge after a debtor has made payments for three to five years (depending on the circumstances of your case) to his creditors.
I previously filed for bankruptcy. Can I still file for bankruptcy?
The answer is yes. The amount of time that it will require for you to receive a discharge if your subsequent bankruptcy case will depend on which chapter under the Bankruptcy Code that you filed.
If you received your first discharge under Chapter 7, you cannot receive a second discharge in any Chapter 7 case that is filed within eight (8) years from the date that the first case was filed.
If you received your first discharge under Chapter 13, you cannot receive a second discharge in any Chapter 13 case that is filed within two (2) years from the date that the first case was filed.
There are also many rules regarding the filing of a chapter 7 case after a chapter 13 case or vice verse.
I am behind in my mortgage. Can I save my house?
The answer to your question is yes. In this type of situation, it would most likely be advisable to file a Chapter 13 case on your behalf. In a Chapter 13 case, you will be given the opportunity to repay all secured debts, including your mortgage, over a three to five year period of time. Additionally, you will most likely be responsible for only a portion of your unsecured credit, including credit cards. In summary, the benefits of a Chapter 13 plan are the following:
- Repay missed mortgage payments (your mortgage arrears) over the life of the repayment plan, typically three to five years;
- Pay a fraction (or sometimes, nothing) of your unsecured debts during the plan period and probably eliminate these other debts entirely when you complete your plan, freeing up money to pay your mortgage;
- Ask the court to reduce (“cram down”) certain secured debts to the value of the collateral (for instance, reduce your $20,000 car note to the actual value of the car, say $12,000, reducing your monthly payments);
- Contest the legality of the proposed foreclosure in the bankruptcy court;
- Contest any claims for costs and fees that are added to the missed payments you'll repay as part of your plan (these costs are commonly made erroneously); and
- Get rid of (strip off) liens on your home created by second and third mortgages, as long as they are wholly unsecured by your home (that is, if your home were sold the proceeds would be insufficient to pay back any portion of the lien).
I owe hundreds of thousands of dollars in credit cards. Will I be able to walk away from my debts?
The answer is most likely yes. It is first important to understand the different types of debts that exist. A credit card, monetary judgment, or any other debt in which money is not pledged as collateral, is referred to as an “unsecured debt.” Most debts can be classified as unsecured. On the other hand, a “secured debt” is debt backed or secured by collateral to reduce a lender's risk associated with lending. Common examples of secured debt are home mortgages or car loans.
The forgiveness of debts in a bankruptcy case is commonly referred to as a “bankruptcy discharge.” A bankruptcy discharge releases a debtor from personal liability for debts. In other words, the debtor is no longer legally required to pay any debts that are discharged. The discharge is a permanent order prohibiting a debtor's creditors from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters and personal contacts. This forgiveness of debt, however, most typically refers to credit card debt or other unsecured debt.
Furthermore, the method to receive a discharge in a Chapter 7 case or a Chapter 13 case differs. With a Chapter 7 filing, generally, all unsecured debts are instantly forgiven upon the granting of a bankruptcy court's discharge order, pursuant to 11 U.S.C. § 727. With a Chapter 13 filing, pursuant to 11 U.S.C. § 1328(b), a court will enter a discharge order only after a debtor completes plan payments of three (3) to five (5) years. Accordingly, a debtor cannot receive a discharge for a lengthy period of time in a Chapter 13 filing.
At face value, a Chapter 7 petition appears to be optimal to Chapter 13. However, many subtleties exist between these two provisions of the Bankruptcy Code, depending on the individual circumstances of your case.
If I file for bankruptcy, will it affect my employment?
Under federal law, no employer, public or private, may fire you because you filed for bankruptcy. In addition, no employer may discriminate against you in other terms and conditions of employment (i.e. reduction in salary, demotion, taking away of responsibilities) because of your bankruptcy. Specifically, 11 U.S.C. § 525(a) states the following:
(a) [A] government unit may not . . . deny employment to, terminate the employment of, or discriminate with respect to employment against, a person that is or has been a debtor under this title or a debtor under the Bankruptcy Act[.]
(b) No private employer may terminate the employment of, or discriminate with respect to employment against, an individual who is or has been a debtor under this title, a debtor or bankrupt under the Bankruptcy Act[.]
I cannot afford my student loans. Should I file for bankruptcy?
Before considering your situation, it is important to keep in mind that you are not alone. First, we must consider the general picture of the student loan debt landscape. Most recent reports indicate that there is:
- The total amount of U.S. student loan debt is $1.26 trillion dollars.
- Currently, 44.2 million Americans have student loan debt
- The student loan delinquency rate is 11.1%
- The average monthly student loan payment is $351
- The median monthly student loan payment is $203
Second, although many claim that it is “impossible” to discharge student loan debt, that is not true. Pursuant to 11 U.S.C. § 523(a)(8), a student loan may be discharged when it constituted an “undue hardship” on the borrower. Specifically, § 523(a)(8) states the following:
A discharge under section 727, 1141, 1228(a), or 1328(b) of this title does not discharge an individual debtor from any debt – unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents[.]
The phrase “undue hardship” has been stringently interpreted by the United States Court of Appeals for the Second Circuit in the case, Brunner v. New York State Higher Education Services Corp., 831 F.2d 395 (2d Cir. 1987). After the interpretation in Brunner, the following three requirements must be demonstrated:
(1) The debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for himself and his dependents if forced to repay the loans;
(2) Additional circumstances must exist that indicate the state of affairs are likely to persist for a significant portion of the repayment period of the student loans; and
(3) The debtor must have made good faith efforts to repay the loans.
Third, even if filing for bankruptcy is not the proper action, there are many federal programs that are available to assist debtors with student loan debts. For example, the federal government has established the Pay as You Earn (PAYE) and Income Based Repayment (IBR), which are two plans that allow debtors to pay a certain percentage of their disposable income into their student loans, regardless of indebtedness.