13 Steps to Take Before Declaring Bankruptcy
July 29, 2024
Declaring bankruptcy is a major financial decision that could impact your life for a long while afterward. As bankruptcy lawyers, we recommend that you approach bankruptcy thoughtfully after exploring alternative options.
That said, before you declare bankruptcy, we suggest you take the following steps to help you determine if this is really the right choice for you.
1. Assess Your Financial Situation
Before considering bankruptcy, it's crucial to have a clear understanding of your financial position. Take stock of your income, assets, debts, and expenses. Making this assessment will help you determine whether your financial problems are temporary or likely to persist.
Make a list of all your debts, including credit cards, loans, medical bills, and any other obligations that your money would need to go toward. Calculate your monthly income after taxes and compare it with your expenses. Identify areas where you can reduce spending to free up more money for debt repayment. For example, you may be able to cancel unnecessary subscriptions, adjust your shopping habits, and more. If your financial situation is dire, it may be worth talking to a bankruptcy lawyer.
2. Explore Alternatives to Bankruptcy
Bankruptcy can be freeing for many, but it should be a last resort. Some great alternatives to consider include: negotiating with your creditors to discuss restructuring your debt or lowering your interest rate; consolidating your debt into a low-interest loan to make it easier to manage payments; and seeking assistance from a credit counseling agency that could help you create a budget, negotiate with creditors, and develop a debt management plan. If you've already been through these alternatives and they haven't been able to help you meet your goals, seeking out a bankruptcy lawyer may be the right option.
3. Understand the Types of Bankruptcy
The two most common types of bankruptcy include Chapter 7 and Chapter 13. Each has different implications and eligibility requirements.
Chapter 7 is also known as liquidation bankruptcy and involves selling off any non-exempt assets you may have to repay your creditors. This type of bankruptcy will wipe out most of your unsecured debts, such as medical bills or credit cards, that could be hanging over your head.
Chapter 13 is also known as reorganization bankruptcy, and it involves exactly what you would think: creating a repayment plan to pay off your debt. The timeframe for repayment is three to five years, according to the United States Courts. This type of bankruptcy allows you to keep and maintain your assets while still giving you the opportunity to catch up on any missed payments you may have.
Another type of bankruptcy is Chapter 11, which is similar to Chapter 13 in that it helps business owners reorganize their debts while giving them the opportunity to keep operating. Business owners may choose Chapter 11 because it gives them the ability to work toward becoming profitable again while also offering them some financial relief.
4. Consult With a Bankruptcy Lawyer
Seeking advice from a qualified bankruptcy lawyer like those on our legal team at Vivona Pandurangi, PLC in Falls Church, Virginia, is essential in order to understand the legal implications and requirements of bankruptcy. A bankruptcy lawyer can review your financial situation and advise whether this is the best course of action for you.
We can guide you through the legal process, including assisting you with paperwork, court appearances, and negotiations with credits. We can also help you understand your rights and responsibilities under bankruptcy law so you can feel confident in your decision.
5. Gather Financial Documentation
If you decide to proceed with bankruptcy, you'll need to gather important financial documents to support your case. These documents include:
Income Statements: Recent pay stubs, tax returns, and other proof of income
Asset Information: Documentation of property ownership, investments, and valuable assets
Debt Records: Detailed records of all debts, including amounts owed and creditors' contact information
If you need assistance determining which documents you may need to file, be sure to consult with a bankruptcy lawyer at Vivona Pandurangi, PLC in Alexandra, VA or the surrounding areas. We're here to help.
6. Attend Credit Counseling
Before filing for bankruptcy, you'll need to complete a credit counseling course from an approved agency. This course helps you understand the implications of bankruptcy and explore alternatives.
The U.S. Trustee Program provides a list of approved credit counseling agencies. Make sure the agency is reputable and accredited. After completing the course, you'll receive a certificate of completion, which is required when you file for bankruptcy.
7. Evaluate the Impact on Your Credit Score
Bankruptcy can impact your credit score and ability to obtain credit in the future, which is why it's important that you know this before filing. Your bankruptcy remains on your credit report for several years, myFICO reports — about 10 years for Chapters 7 and 11 and seven years for Chapter 13. Understanding the long-term effects can help you weigh the decision carefully.
8. Seek Emotional Support
Financial difficulties and the decision to declare bankruptcy can be emotionally challenging. Be sure to seek support from family, friends, or a therapist to help you through this stressful time. It's important to have a support system in place before you go through with a major financial decision like this.
9. Review Bankruptcy Exemptions
Before filing for bankruptcy, it's essential to understand what property you can keep, known as exemptions. Exemptions vary by jurisdiction and can include items such as your home, vehicle, clothing, and necessary household goods. Understanding exemptions helps protect important assets during bankruptcy proceedings. If you're not sure about which local exemptions apply to you, be sure to consult with your bankruptcy lawyer at Vivona Pandurangi, PLC.
10. Consider the Impact on Co-Signers and Joint Debt Holders
If you have joint debts or co-signers on loans, bankruptcy may impact them as well. While your liability for the debt may be discharged, creditors can still pursue payment from co-signers or joint account holders. Communicate openly with them and consider how bankruptcy may affect their financial situation. If possible, try to negotiate with creditors or seek debt relief options that don't involve bankruptcy to protect co-signers. Your bankruptcy lawyer may be able to help you negotiate with your creditors as needed.
11. Evaluate Tax Implications
Certain types of debt forgiveness through bankruptcy may have tax implications. Forgiven debt generally counts as income for tax purposes unless you qualify for an exemption. Understanding potential tax implications can help you plan for any additional financial obligations post-bankruptcy. Be sure to discuss potential tax implications with a tax professional to help you better understand how to handle these implications effectively.
12. Prepare for Mandatory Financial Management Education
In addition to credit counseling before filing for bankruptcy, you'll also be required to complete a financial management course after filing. This course aims to provide education on budgeting, managing credit, and avoiding future financial difficulties. Be sure to research approved financial management courses so you'll be prepared to fulfill this requirement after you file.
13. Maintain Detailed Records
Throughout the bankruptcy process, keep thorough records of all financial transactions, communications with creditors, and court documents. Organized documentation helps guarantee compliance with legal requirements, and it helps to facilitate a smoother bankruptcy process both for you and your bankruptcy lawyer.
You'll want to maintain records of income sources, expenses, and any changes in financial circumstances, and you'll want to keep correspondence, such as letters, emails, and notices related to your bankruptcy case.
Speak With a Bankruptcy Lawyer Today
Declaring bankruptcy is a serious decision that requires careful consideration and preparation. By assessing your financial situation, exploring alternatives, consulting with a bankruptcy lawyer, and understanding the tax and credit implications, you can make an informed choice.
If you're ready to speak to a bankruptcy attorney or need legal advice regarding filing, don't hesitate to reach out to our experienced legal team at Vivona Pandurangi, PLC today. We have offices in Alexandra and Falls Church, and we service the surrounding counties of Fairfax, Arlington, Prince William, and Loudon.