Though no one wants to have to file for bankruptcy, it may sometimes be the best option available. Many Americans face situations where debts become overwhelming, and paying back what is owed while also being able to meet a family's ongoing needs may become impossible. Bankruptcy can be the ideal way to receive relief in these situations, and it can often help resolve debt-related issues before they get worse and lead to consequences such as repossession or home foreclosure. By understanding some of the most common reasons people pursue bankruptcy, you can realize that you are not alone and that you have options.

Financial Issues That Often Lead to Bankruptcy

The need for debt relief can arise in a variety of situations, including:

• Job Loss or Reduction in Income - One of the most common reasons people file for bankruptcy is due to a loss of income. This can come in the form of a job loss or a significant reduction in salary. If you lose your job, it can be difficult to make ends meet, especially if you have a family to support. If you have exhausted all other options, such as borrowing money from friends or family or selling possessions, filing for bankruptcy may be your best option. 

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Along with the ability to eliminate certain types of debts, one of the key benefits of bankruptcy is the automatic stay. This is an order that is put in place by a bankruptcy court immediately after a debtor files for bankruptcy, and it will force creditors to cease all collection actions during the case. This means that creditors cannot call, email, send letters, or otherwise communicate with a debtor. They cannot proceed with a legal judgment against a debtor, garnish their wages, freeze or seize their bank accounts, repossess a vehicle or other property, or take any other actions in an attempt to collect a debt. Any foreclosure proceedings that have been initiated must be put to a halt.

The automatic stay can provide a debtor with protections and give them some "breathing room" as they address their debts during the bankruptcy process. However, there are some situations where the automatic stay can be lifted. By understanding when a creditor may request an exception to the automatic stay, a debtor can make sure they are prepared to address these issues as they proceed with bankruptcy.

The Purpose of the Automatic Stay

The main purpose of the automatic stay is to provide a debtor with relief from creditor harassment and give them time to reorganize their finances during bankruptcy. It is designed to stop creditors from taking aggressive or unfair collection actions, and it also ensures that any assets turned over by the debtor will be distributed fairly without giving preference to any creditors.

The divorce process can cause both spouses to experience financial difficulties. Finding new living arrangements and making adjustments to budgets will usually be necessary, and each spouse will need to determine how they will be able to support themselves on a single income. This process can be even more difficult if a couple has significant debts. In these cases, one or both spouses may be considering filing for bankruptcy, but when doing so, they will need to understand their options and the complications that may arise.

Chapter 7 Vs. Chapter 13 Bankruptcy and Divorce

Decisions about whether to file bankruptcy before, during, or after divorce will often depend on the type of bankruptcy a person or couple plans to pursue. While Chapter 7 bankruptcy will allow most debts to be eliminated, a couple may not qualify for this form of relief if they do not pass the means test because their combined income exceeds the median income in their area. For those who do qualify, completing a Chapter 7 bankruptcy before filing for divorce may be a good solution for addressing joint debts, and it may put both parties in a better financial position as they work to complete the divorce process. Either spouse may also choose to pursue an individual Chapter 7 case after completing their divorce.

If Chapter 7 is not an option, Chapter 13 bankruptcy may be available. In these cases, a debtor will propose a repayment plan in which he or she will make monthly payments for a period of three to five years. Because of this, Chapter 13 is usually not a good solution for spouses who are planning to get a divorce. If a couple had previously filed a joint Chapter 13 case and have a repayment plan in place, they will need to determine how to handle this plan after their divorce. In some cases, a bankruptcy may be “severed,” creating individual repayment plans for each spouse, while in others, a Chapter 13 case may be converted to a Chapter 7 bankruptcy for one or both spouses. 

If you are considering bankruptcy, you generally have two options. Chapter 7 is often the simpler option, but while it may allow a bankruptcy to be completed and debts to be eliminated within a few months, it may result in the loss of certain assets. If you want to avoid losing property such as your home, or if you are unable to pass the means test allowing you to qualify for Chapter 7, you may opt for Chapter 13 bankruptcy. In this type of bankruptcy, you will put a certain amount each month toward a repayment plan, and your unsecured debts will be discharged once the plan is complete. When planning your Chapter 13 case, it is important to understand how the amount you will pay toward your repayment plan will be determined, as well as how long these payments will last.

Calculating Disposable Income

In a Chapter 13 bankruptcy, you will be required to put your disposable income toward repaying as much of your debts as possible during your repayment plan. Your disposable income is calculated by taking your average monthly income from all sources and subtracting the following deductions:

• Housing expenses - This includes mortgage or rent expenses, as well as utilities and operating expenses. Rent, utilities, insurance, and similar expenses are usually determined based on the average expenses incurred by a family of your size in your county. However, the actual amount you put toward mortgage payments for all home loans will be used to calculate your disposable income.

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One reason that many people are hesitant to consider bankruptcy is because they do not want their credit score to be negatively affected. This score can play a significant role in your ability to obtain credit or loans in the future, so if you are planning to buy a home or car or make other large purchases, you may worry that bankruptcy will prevent you from doing so. However, if you are considering bankruptcy, it is likely that you are already encountering issues that may significantly lower your credit score, such as missed payments on credit card debts or other bills. Rather than trying to dig your way out of the hole you are in, bankruptcy can provide you with a fresh start, and while your credit score may take a hit, you can begin rebuilding your credit after wiping out some or all of your debts. 

Time Needed to Rebuild Credit After Bankruptcy

The amount of time bankruptcy will stay on your credit report will depend on the type of bankruptcy you file. Chapter 7 bankruptcy will remain on your record for 10 years, but Chapter 13 bankruptcy will only affect you for around seven years. While a bankruptcy filing may limit your opportunities to receive loans, as time passes after a bankruptcy, creditors will be less likely to see you as a risk.

To increase your credit score and make yourself more attractive to creditors, you can take a number of steps in the years following a bankruptcy, including: