For individuals unfamiliar with bankruptcy, there are numerous myths surrounding the popular form of debt relief. It's important to know exactly what bankruptcy can and can't do before embarking on filing for Chapter 7 or Chapter 13 bankruptcy. Because of the long-lasting financial and personal ramifications, it's highly recommended that you consult a professional bankruptcy attorney where you live in order to find out what will happen to your debt and property once you file for bankruptcy protection. If you are just starting your bankruptcy research, here is a list of advantages that bankruptcy can afford you.
Relieve Your Legal Obligation to Pay Many Debts
In both forms of consumer bankruptcy, your legal obligation to pay debts such as unsecured debts that aren't taxes or family support is extinguished. Unsecured debts are those not secured by collateral, inducing credit card debt, medical bills, and certain lawsuit judgments. At the conclusion of a successful bankruptcy case, you receive what is known as a discharge, which officially removes your obligation to pay.
Stop Collection Activities
From the moment you file your petition for bankruptcy protection you receive what is called an "automatic stay" which makes it illegal for creditors to continue most forms of collection activity, including:
- Wage garnishments
- Bank Levies
- Collection Calls or Attempts
- Utility Disconnections
- Auto Repossessions
The Bankruptcy Court will notify your creditors that you list on your bankruptcy forms (and you must list all), that you have filed bankruptcy along with other instructions on how they can best collect the money owed to them. The idea behind the automatic stay is to give the debtor enough time to reorganize their finances and hopefully come up with a plan that pays back creditors at least a portion of what they are owed.
Start Rebuilding Your Credit
Some debtors are put off from filing bankruptcy because they are worried about a decrease in their credit, however, continuing to miss payments is just as detrimental to your FICO score and could even be worse. Instead, Chapter 13 and especially Chapter 7 bankruptcy allow you to remove excessive, unsecured debt and begin making regular payments to rebuild your credit score.
Catch up on Past Payments
For individuals that declare bankruptcy but want to keep an automobile and house backed by a secured interest loan, Chapter 13 bankruptcy will allow you to do just that. Chapter 13 bankruptcy allows you to reaffirm a debt, or sign new loan papers, in addition to, paying back any past due payments over time. By "folding" your past due auto and mortgage payments into a monthly payment spread over a total of five years, you'll get the clean slate you need to get a handle on your debt.
Remove Judgment Liens against Property
While certain requirements must be met in order to remove a lien using bankruptcy, it is possible, making bankruptcy ideal for property owners in debt who have judgment liens on their property. The main determinant for removing judgment liens is the value of your home or asset with the lien, the number of senior liens, and how much your state exemptions allow you to protect.
Remove Junior Mortgage Liens
If you have junior liens on your home, Chapter 13 bankruptcy may be able to remove them and reclassify that debt as unsecured and thus eligible for discharge. In a method known as "lien stripping", you can make second mortgages unsecured debt that can be wiped out at the conclusion of your bankruptcy repayment plan. Being able to strip a second lien or junior mortgage depends on how much equity you have in your home.
Avoid tax consequences for forgiven debt
You may have heard the idea that the IRS considers certain types of debts that are discharged as income that must be included on your tax return. This generally doesn’t apply to bankruptcy filers, and more often than not, debtors who file bankruptcy aren't required to include canceled debt in taxable income. If you do receive a Form 1099-c from a lender showing the amount of the debt that has been canceled, you must include additional paperwork with your tax return that shows the discharged amount that is excluded from income.
Contact a Sacramento Bankruptcy Attorney
It's important to remember that every single bankruptcy case is different, not only because each individual has a different portfolio of assets and debts, but also because bankruptcy rules vary from state to state. Contact a Sacramento Bankruptcy Attorney or bankruptcy lawyer where you live before attempting to file bankruptcy on your own in order to ensure all your goals are accomplished by filing for debt relief.