People have a lot of concerns when they consider bankruptcy, from the possibility of losing assets to what happens with creditor harassment. One of the biggest worries is how bankruptcy in Arizona will affect your credit score. It is easy to see that there are consequences when you are eliminating debt to the detriment of creditors. With both Chapter 7 and Chapter 13, there are impacts on your credit rating as far as points and duration.
However, it is a mistake to only focus on your credit score when reviewing your bankruptcy options. There are benefits compared to trying to pay down your debt, making little progress as you pay as much as you can possibly afford. Chapter 7 discharges the debt, while Chapter 13 involves a debt repayment plan. With both, you get a fresh start and can start rebuilding your credit rating.
For many considering bankruptcy, the effects on their credit score are worth weighing against the benefits. An Arizona bankruptcy attorney can help you understand Chapter 7 and Chapter 13, so you can assess whether either type is a good fit for you. Some information on bankruptcy and your credit rating will also be useful.
Chapter 7 and Your Credit Score
With Chapter 7 bankruptcy, qualifying debts are eliminated at the end of the case and you will not owe creditors. The downside for some filers is that they could be forced to liquidate assets that are not exempt from the bankruptcy process. Your property could be sold, with the proceeds used to pay your debt to creditors. In practice, many Chapter 7 cases are considered “no-asset” because the filer does not have nonexempt assets, or selling them would not be productive.
Chapter 7 may benefit you, but it does harm the financial interests of creditors. Therefore, bankruptcy rules aim to ensure that only filers who truly need this remedy are eligible. To qualify:
- You must earn at or below the state median income for Arizona; or,
- You earn higher than the state median income, but you meet the Means Test. This measures your disposable income after paying your mortgage, rent, and high-priority monthly bills.
Your credit score may drop significantly by going through Chapter 7, but consider how it was being affected when you could not pay your bills. This type of bankruptcy case will remain on your report for 10 years.
Your Credit After Chapter 13
Paying back some of your debt is the focus of Chapter 13, so the eligibility rules are relaxed. You will typically qualify if you have a steady income. For this type of bankruptcy, your assets cannot be liquidated by the bankruptcy trustee.
In a Chapter 13 case, you will create a debt repayment plan that pays off some debt to creditors but is less than what you owe. Still, it will be an amount you can afford on a monthly basis, and it will not change throughout the course of your case. Once you complete the debt repayment plan, within either three or five years, the remaining debts are discharged.
Chapter 13 bankruptcy will reduce your credit score, but for only 7 years compared to 10 for Chapter 7. The shorter duration is linked to the fact that you were able to pay some amounts to creditors through the debt repayment plan.
How Bankruptcy Proceedings Work
Chapter 7 and Chapter 13 are governed by entirely different rules, but many of the basics are the same as far as the steps. With both, your preparations start well before you file. You will need to complete a credit counseling course within 180 days. Plus, bankruptcy is a process that centers on paperwork. You must collect and organize all financial documents, including bank statements, pay stubs, information on assets and debts, and your monthly expenses. With a Chapter 7 case, much of this documentation will be used to prove eligibility and assets exempt versus nonexempt assets. For Chapter 13, you need this paperwork as you develop your debt repayment plan.
Once you complete preparations, the steps for bankruptcy include:
- You fill out and file the Chapter 7 or Chapter 13 bankruptcy petition, with schedules.
- You must submit your debt repayment plan for Chapter 13 with your petition or within 14 days thereafter.
- The bankruptcy trustee is appointed to manage the case and bankruptcy estate.
- Within 30 days after filing Chapter 13, you begin paying according to the debt repayment plan you proposed, even though it has not yet been approved.
- The meeting of creditors is held, where you answer questions and provide information to confirm the details you included in your bankruptcy petition.
- For a Chapter 13 case, a hearing is conducted to confirm the debt repayment plan and your ability to comply with it. You might need to modify it to satisfy the objections of creditors. Once entered, you will continue making payments for three to five years.
Around 75 days after the meeting of creditors, a discharge order is entered for a Chapter 7 case. A Chapter 13 case remains open while you work on the debt repayment plan, and you receive a discharge order once complete.
Bankruptcy is a Fresh Start
Focusing only on your credit score means you miss out on the opportunities offered by Chapter 7 and Chapter 13. The fact is that your credit rating has probably already dropped, so bankruptcy is a way to stop it from going down further. One of the most crucial benefits is one you will notice right away when you file. Upon receiving your petition, the bankruptcy court issues an automatic stay on creditor efforts to collect. Creditors cannot call, threaten a lawsuit, or garnish your wages. Foreclosure proceedings will cease, and your car cannot be repossessed.
In addition, bankruptcy is a new beginning for your financial life. You emerge debt-free, with the exception of those you cannot discharge like child support, alimony, and certain tax debts. You will not be paying amounts toward a balance that never goes down because of late fees and interest. Many filers will shed the anxiety, stress, and depression that come with overwhelming debt, enabling them to be more productive. Plus, with the knowledge you gain from completing credit counseling and debt management courses, you have the tools to stay debt-free.
Steps to Rebuild Credit After Bankruptcy
You do not have to wait 7 or 10 years to start getting your credit rating back on track, so you should begin with some basic tasks right away. Your mortgage may have resumed after bankruptcy, and you have monthly bills for utilities, so absolutely stay current with these payments to rebuild credit. You may also qualify for a secured credit card or line of credit, which you draw from and then pay back every month. Your efforts show a track record of responsible fiscal management, which could increase your credit score even during the time that bankruptcy appears on your report.
How an Arizona Bankruptcy Attorney Helps
The above information should be convincing about the need for legal representation in Chapter 7 or Chapter 13. Your Arizona bankruptcy lawyer will take on the essential tasks for your case, including:
- Reviewing your documents and circumstances to determine which type of bankruptcy would help achieve your goals;
- Classifying assets as exempt or nonexempt, and developing a strategy to protect nonexempt assets from liquidation in Chapter 7;
- Carefully assess your paperwork to create a Chapter 13 debt repayment plan that will be suitable for you and acceptable to the court and creditors;
- Attending the meeting of creditors to support you while creditors ask questions about your assets, income, expenses, and finances;
- Negotiating with creditors and making any adjustments to get the court’s approval for your Chapter 13 debt repayment plan; and,
- Coordinating with the court to obtain the discharge order for Chapter 7 or Chapter 13.
Do’s and Don’ts as You Prepare to File for Bankruptcy
Bankruptcy is a smooth process when you have a Chapter 7 and Chapter 13 attorney to assist, but there are a few points to know as you prepare to file. There are some acts that could actually harm your interests, but there are other factors to know because you can support your case.
DO leave your retirement accounts alone. Avoid giving into the temptation to pay debts from your pension because plans covered by the Employee Retirement Income Security Act (ERISA) are exempt from bankruptcy.
DON’T give away assets or sell them for significantly less than fair market value. This could be considered fraud, and the bankruptcy trustee does have the power to void the transaction.
DO continue to file income tax returns and pay income taxes.
DON’T try to file bankruptcy if you previously went through the process in the recent past. You must wait from two to eight years after filing a Chapter 7 or Chapter 13 case to file again.
DO set up and strictly live by a budget. You will develop responsible habits early to carry you through the bankruptcy process and the years after.
An Arizona Bankruptcy Lawyer Can Provide Additional Details
There is no denying that there are negative consequences for your credit score when you file Chapter 7 or Chapter 13, but it is important to put things into perspective. There are plenty of advantages you gain with bankruptcy when debt is overwhelming. For more information on your credit rating after bankruptcy, please contact DebtBusters in Scottsdale, AZ. You can set up a no-cost consultation at (866) 223-4395 or visit us online. After reviewing your situation, an Arizona Chapter 7 or Chapter 13 attorney will help you make the right decision about your future.
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