Bankruptcy. From the first time you heard someone say it, you’ve known that word carried some kind of social stigma. In Monopoly, players who go bankrupt are out of the game — “Do not pass Go, do not collect $200,” etc.
Fortunately, real life isn’t a board game. In life, bankruptcy isn’t nearly as bad (or even uncommon) as you might think. In fact, one in ten American households declared bankruptcy in recent years. And yes, there are even some benefits to filing either Chapter 7 or Chapter 13 bankruptcy.
Let’s take a look at some bankruptcy benefits that can help you start moving forward after discharging all that debt.
What’s the Difference Between Chapter 7 and Chapter 13?
According to Experian, there’s one major difference: Whether or not you’ll have to pay back at least some of your outstanding debt. Those who file Chapter 13 bankruptcy usually have a regular income or financial assets, so they elect for partial debt repayment. For this reason, the bankruptcy public record only stays on your credit report for seven years from your filing date. Under Chapter 7 bankruptcy, you don’t have to repay outstanding unsecured debt (except for student loans). As a result, the bankruptcy public record stays on your credit report for 10 years after your filing date.
Five Little-Known Bankruptcy Benefits
Regardless of which Chapter you choose, here are five bankruptcy benefits you can look forward to after you file:
1. You’ll protect at least some cash to pay for urgent expenses.
Declaring bankruptcy means you’ll instantly have more cash on hand to pay for anything you need to live. This includes expensive medical treatments, which are still the largest issue driving personal bankruptcy filings in the United States. That said, the Affordable Care Act did cut bankruptcy filings in half since its implementation, according to a recent Consumer Reports study.
2. You’ll enjoy some tax deductions.
According to the Internal Revenue Service, you can deduct some surprising bankruptcy-related costs from your income taxes! For example: When another person or entity either cancels or forgives debt, the IRS sees that amount as taxable income. If that same debt’s discharged through a bankruptcy proceeding, however, the forgiven amount doesn’t count towards your taxable income. In other words, if you discharge $30,000 in credit card debt through Chapter 7 bankruptcy, your taxable income won’t go up by $30K. Furthermore, the bankruptcy estate (i.e., you) can also list any administrative expenses and fees as deductions on your income taxes. These typically include accounting fees, attorney fees, and court costs. After you file for Chapter 7, you’ll also get an automatic six-month extension for filing your bankruptcy estate tax return.
3. You’ll live longer.
Stress kills and worrying about money tops many people’s list. Chapter 13 bankruptcy adds 30% to your lifespan after your filing’s approved, according to the National Bureau of Economic Research. The study also found debtors receiving Chapter 13 protection reported 25.1% higher annual earnings in the five-year post-filing period. Those whose Chapter 13 filings weren’t approved earned $5,562 less annually during that same five-year timeframe.
4. You’ll secure your most important financial assets.
Bankruptcy exemptions vary by state, but in most cases, you’ll keep key financial assets safe from repossession or foreclosure, including:
- Your home
- Clothing, including work uniforms
- Household goods, appliances, and your wedding rings/most jewelry
- Important items you need for employment reasons, such as tools, musical instruments, equipment, etc.
- Health aids and medical devices (wheelchair, cane, mobility walker, glasses, etc.)
- Your primary vehicle
Stopping foreclosure proceedings on your home and protecting your car from repossession may be two of the biggest bankruptcy benefits. In fact, the moment you file, any current proceedings against your home or vehicle must stop immediately.
5. Creditors and debt collectors must immediately stop calling you.
Many people who’ve fallen into debt hate answering the phone — and for good reason. Creditors (or worse, debt collectors) calling at all hours would make anyone hesitant to pick up. Ending those calls is of the first bankruptcy benefits most people look forward to when declaring personal bankruptcy.
Biggest Bankruptcy Benefits: Less Debt, Greater Financial Literacy
When you declare bankruptcy, you’re forced to deal with the root problem that’s causing your financial stress. Whether you have low financial literacy and/or poor spending habits, federal law says all bankruptcy candidates must undergo credit counseling. This is true for both Chapter 7 and Chapter 13 filings. In fact, you’ll need to complete two separate requirements before filing personal bankruptcy, according to uscourts.gov, which include:
- Pre-bankruptcy credit counseling and
- Pre-discharge debtor education.
You’ll need to complete your credit counseling course within six months prior to filing bankruptcy. After you’ve filed, you’ll need to fulfill your debtor education requirements to complete your Chapter 7 or Chapter 13 bankruptcy.
Need help figuring out which chapter bankruptcy’s right for you? Take this brief online survey to find out in just minutes.