Bankruptcy – a legal blessing for an individual or business organization who are unable to pay their debts. Debts can be dealt with differently by various bankruptcies. While undergoing bankruptcy, one should declare all his/her assets. Not disclosing any asset, lying about the property ownership or making a transfer to someone else’s name can invite severe penalties if it gets caught.
Most financial advisers recommend bankruptcy as a last option when you don’t have sufficient income to repay your debts within a time of 7 years. You may proceed with filing bankruptcy only if you have enough income to fulfill your primary needs like, clothing, food, shelter and transportation as this will clear only medical bills, personal loans and debts on your credit card that are unsecured.
Mostly, even after filing bankruptcy, debtors are not completely rescued from the responsibility of repaying their tax debts. However, only in some cases bankruptcy law allows the discharge of debt. Whereas in other instances an automatic stay order goes into action where the IRS officers and creditors are immediately stopped from their tax collection activities. When the stay order is lifted by the bankruptcy court, the IRS officers can resume their tax collection activities until the debtor completely pays off their tax debt.
Mainly there are three types of bankruptcies, namely chapter7, chapter11, and chapter13.
Chapter 7: It is known as straight bankruptcy. Except for a car or household things, everything else will be sold out when you file bankruptcy under Chapter 7 and the money obtained will be used to repay debts. Anything remaining will be written off so that no creditors can chase you again. Your income should be below the state median to become eligible for filing chapter7 bankruptcy.
Chapter 11: This can be filed by individuals or business firms. It helps to rearrange and minimize the debt as this does not discharge the debt completely. Filing Chapter 11 is beneficial to individuals as it helps to possess certain assets like a house, and in business, one need not cease the operations as compared to chapter 7.
Chapter 13: This will allow you to come up with a payment plan to repay the debts in 3 to 5 years. To file this, you should have a steady income through which the repayment of the debt is made possible. Your assets are safe in this as you need not sell them. If there is any balance payment it will be written off at the end of the payment period.
When you reach the stage of declaring bankruptcy, you shall approach an experienced bankruptcy attorney for help. Lawyers specialized in the field of finance can help you come out of this stage. An experienced tax attorney is well updated and is aware of the current trends to deal with such issues. Such attorneys can guide you on how bankruptcy will affect you and find an appropriate alternative to bring you peace of mind.
Advantages of declaring bankruptcy
- It allows you to be free from most of your debts or allows you to have a payment plan to repay the debts over some time.
- Creditors will chase you for money as there will be an effective stay order once you file for bankruptcy. This moratorium helps you from public harassment.
- It gives many options to repay the creditors depending on the payment plan.
- In certain situations, the benefits of bankruptcy are many, as it can also help you deal with unpaid income tax debt, can clear the old financial crisis and help you get a fresh start all over.
- It helps to reduce or get rid of the back taxes that you owe to the IRS. During bankruptcy, in certain circumstances, both federal and state tax debt becomes dischargeable depending on your current financial status. This is purely based on the type of bankruptcy chapter that you file.
There are other alternatives like you can enter into an installment agreement with the IRS, or get into a deal that can delay the IRS collection activities or come up with a compromise offer that lets you pay a reduced amount to the IRS. There will be a user fee in case of an installment agreement. Most of the IRS won’t agree upon compromise offer. These alternatives are worth considering as they are used to address only tax debts and other financial areas that remain unaffected unlike in bankruptcies.
The financial crisis drastically affects a person in every aspect of their life. Bankruptcy can bring safety and explores more opportunities to improve your current situation and helps you restore yourself from all disappointments. Last but not least bankruptcy helps you reset your financial status and begin a new life.
