Want to understand the concept of bankruptcy and Debt forgiveness so that you can know how to use them to your advantage in certain situations? Read this article to get all the information you need.
Bankruptcy vs Debt Forgiveness
Let’s have a good understanding of both terms;
When a person or business is unable to repay outstanding debts or obligations, a legal proceeding called bankruptcy is initiated. It provides a fresh start for people who are unable to pay their bills.
Bankruptcy allows an individual or business to start over by forgiving debts that they are unable to pay. Meanwhile, creditors may be able to obtain some repayment based on the assets available for liquidation of the individual or business.
In theory, the ability to declare bankruptcy benefits the economy as a whole by giving people and businesses a second chance to obtain credit. It can also help creditors recover a portion of their debt.
Who can file for Bankruptcy?
Almost anyone in the United States is eligible to file for bankruptcy, but there are some steps you must take to confirm your eligibility. If you file for Chapter 7 bankruptcy, for example, you must pass the “means test” to determine your disposable income. If you do not pass the means test because your income exceeds the state median, you may still be eligible for Chapter 13 bankruptcy.
Everyone who declares bankruptcy must also attend credit counseling.
How Much Debt do you Need to Have Before you Can File for Bankruptcy?
There is no minimum amount of debt required to file for bankruptcy in the United States. Instead, when you can no longer manage your debts, bankruptcy becomes an option. Unmanageable debt may appear to some as a few maxed-out credit cards. Others may perceive it as an underwater business.
When you file for bankruptcy, the court examines your financial situation carefully. If the court determines that you can repay your debts without declaring bankruptcy, it may recommend an alternative.
There are numerous alternatives to filing for bankruptcy, and the decision to file is entirely up to you. Speaking with a lawyer about your case can help you make the best decision.
When to File for Bankruptcy
Everyone’s financial situation is unique, but there are some universal signs that bankruptcy may be a viable option.
You should think of filing for bankruptcy if:
- You are earning less than the state’s median income.
- You spend the majority of your money on bills and other necessary expenses (you have little to no disposable income)
- Your debts is more than half of your annual income.
- Even if you went to extreme measures (such as skipping meals), you would not be able to pay off your debt in 5 years.
- Your debt is causing extreme stress and harming your health and relationships.
Nobody should have to spend their lives avoiding calls from creditors about debts they can’t afford. If the situation described above sounds familiar, you can consider filing for bankruptcy and having a fresh start.
Debts that Bankruptcy Cannot Forgive
Bankruptcy does not discharge all financial obligations.
It does not release you from the following debts and obligations:
- Student loans from the federal government (unless you meet very strict criteria)
- Alimony and child support that have been ordered by the court
- Debts incurred after declaring bankruptcy
- Some debts incurred in the six months preceding bankruptcy filing
- Some taxes
- Loans obtained through fraud
- Personal injury debts incurred while driving drunk
It also does not safeguard those who co-signed your debts. Your co-signer agreed to pay your loan if you failed or were unable to do so. Your co-signer may still be legally obligated to pay all or part of your loan if you declare bankruptcy.
Debt forgiveness occurs when a lender relieves a borrower of the obligation to repay some or all of the outstanding amount. Individuals must typically negotiate with their creditors in order to reduce their debt burden.
Furthermore, some debt forgiveness programs provide relief to borrowers who meet certain criteria. If there are no other options, one may declare bankruptcy. However, debt cancellation has significant credit consequences as well as tax implications.
Who Can Get Debt forgiveness
If you meet the following criteria, you may be eligible for special debt relief programs:
- Are you a low-income person?
- Are you on a permanent disability?
- Has the coronavirus pandemic affected you?
- You attend classes full-time.
- Work in an eligible occupation depending on the type of debt forgiveness you are opting for.
Make use of the resources at your disposal. Learn everything you can about debt forgiveness from resources such as Upsolve’s Learning Center, the Consumer Financial Protection Bureau, a reputable credit counselor, or even your loan servicer.
If you’re having trouble making your minimum monthly payments, contact your lenders by phone or through your online borrower’s portal to discuss your options. They can frequently assist you in developing a repayment strategy.
Benefits of Debt Forgiveness
Some of the benefits of debt forgiveness are;
Debt forgiveness can assist you in avoiding the need to file for bankruptcy. Not only will bankruptcy remain on your credit report for seven to ten years, but the fees and costs associated with it can be prohibitively expensive. Having a bankruptcy on your credit history can make it difficult to qualify for lines of credit in the future, or at least until the bankruptcy is removed from your credit profile.
Pay Down Your Debts
You may be able to pay a much lower percentage of your debt than you originally owed depending on which debt forgiveness program you are eligible for. This could save you money in the long run and provide much needed financial relief.
Pay Off Debt Faster
Though it depends on the type of debt forgiveness plan you qualify for, this approach to debt management may allow you to reduce or even eliminate your debt in much less time than you had anticipated. Paying off your debts in a shorter period of time may also help you save money.
Drawbacks of Debt Forgiveness
Here are some drawbacks of debt forgiveness;
In general, you must pay income taxes on forgiven debts. Assume you owe $7,500 in credit card debt and agree to settle for $5,000 in cash. In this case, you’d get a 1099-C tax form for the $2,500 in debt forgiveness.
Debt settlement programs typically charge either an upfront fee or a monthly subscription.
Possibility of Incurring Additional Debt
Debt forgiveness may not leave you better off if you do not change your spending habits. To benefit from lower payments or a completely clean slate as a result of debt forgiveness, you must learn to spend less than you earn and never borrow more than you can afford to repay.
Credit History Impact
The majority of debt forgiveness options will have a negative impact on your credit score. This includes filing for bankruptcy, forgiving credit card debt, and attempting to sell your home in a short sale. Student loan forgiveness programs, on the other hand, will not have a negative impact on your credit score.
Requesting debt forgiveness usually requires both time and effort, similar to calling all of your creditors and negotiating a settlement on your own. Signing up for formal debt forgiveness programs or a debt settlement firm will also require time and perseverance.
The concept of bankruptcy and debt forgiveness is very wide. However, we will work on more details in subsequent articles to give more details on these and even more alternatives.