The US filed 370,685 personal bankruptcy cases in 2022. If the economic recovery does not become quick and broad, the effect of job losses, lower income, and the recession brought on by the coronavirus in 2020 could help to explain one in every ten homes having filed for bankruptcy at some point.
Chapters 7 and 13 of Personal Bankruptcy
Chapter 7 Bankruptcy
Chapter 7, in which the filer liquidates their assets to pay off all or a part of the remaining debt, is the most often used type of personal bankruptcy. Many people choose this route since they are greatly overburdened and lack the required income to pay off their debt over a reasonable time frame.
- Means Test: Income of the debtor must satisfy the means test to be eligible for Chapter 7 bankruptcy. Usually qualifying for Chapter 7, their income is below the state median. Otherwise, they could have to look at other possibilities.
- Property Liquidation: In a liquidation bankruptcy, nonexempt assets are auctioned to pay back creditors. Though it marks a fresh start, the debtor can lose some property.
- Foreclosure Protection: Chapter 7 can temporarily slow down the process even though it does not directly stop foreclosure. The debtor has to make up lost mortgage payments, nevertheless.
- Debt Discharge: Apart from some exclusions like student loans and recent taxes, most debts are canceled during liquidation.
- Duration on Credit Report: Remains on the credit report for 10 years.
- Eligibility: Available to individuals, businesses, and partnerships with combined secured and unsecured obligations less $2,750,000.
- Third-Party Protection: No particular clause addressing third-party protection of co-signers.
Chapter 13 Bankruptcy
Chapter 13 gives some quick relief and helps the person filing make a plan to pay back part of the debt based on what they can afford each month. This amount is figured out by their income and what they can realistically pay.
As the person follows this plan and pays off the debt, their credit score will slowly get better. In certain situations, they might be able to get an FHA, VA, or USDA home loan a year after filing for bankruptcy, or wait two to four years for a regular mortgage.
- Means Test: Chapter 13 does not have a rigorous means test. Still, the debtor’s consistent income helps to decide on the payback schedule.
- Property Liquidation: Debtors keep their property and develop a payback schedule. The three to five year schedule allows for slow debt repayment.
- Foreclosure Protection: A significant advantage is its ability to halt foreclosure proceedings. Debtors can cure delinquent mortgage payments over time.
- Debt Discharge: After successfully completing the repayment plan, remaining debts are discharged.
- Duration on Credit Report: Chapter 13 bankruptcy is a bit less punitive than Chapter 7 bankruptcy because it stays on record for only seven years.
- Eligibility: Open to those with consistent income, let them gradually restructure their debt.
- Third-Party Protection: Provides defense for third-party responsibility on “consumer debts.”
The Essential Role of Tax CPAs in Debt Management and Bankruptcy
Integrating the expertise of a tax CPA in the process of managing debt, considering debt relief alternatives, and especially when filing for bankruptcy, can significantly influence the outcomes and ensure that all financial decisions are made with a comprehensive understanding of their tax implications.
Immediate Effects and Long-term Consequences of Bankruptcy
Filing for bankruptcy can quickly stop creditors from calling and threatening actions like eviction, foreclosure, repossession, utility shutoff, or wage garnishment, giving you a break during tough financial times. But, be ready for some tough moments, like the court taking some of your belongings to sell and pay off debts, or your credit cards being canceled.
It’s important to understand that this process may also limit your ability to obtain new lines of credit, making it challenging to rebuild your financial standing quickly. The emotional toll of filing for bankruptcy, including feelings of embarrassment or failure, should not be underestimated, but it’s also a step towards regaining financial stability.
Given the immediate relief and long-term effects of bankruptcy, a tax CPA can provide priceless guidance on how the choice can influence your present and future tax circumstances. Complicated tax effects of bankruptcy include possible taxation of forgiven debt or consequences for tax returns in the years after the filing. A tax CPA can help you negotiate these subtleties and avoid unanticipated tax obligations or lost opportunities for tax savings.
Exploring Debt Relief Options
TV commercials claiming to assist lower debt without resorting to bankruptcy may catch your attention. Keep in mind that even though these services can negotiate lower payments you can manage, they won’t prevent damage to your credit score. Whenever someone arranges to lower your debt, it appears as a negative mark on your credit report and can stay there for a long time.
Researching any debt relief program is also essential to avoid frauds that target people in great need of a debt release. Many often, these services include hidden costs that could aggravate your financial position.
Seeking advice from a tax CPA will also help one negotiate the tax consequences of debt reduction plans. For instance, if a debt settlement is reached, the IRS may consider forgiven debt as taxable income, which could significantly impact your tax situation. They can offer strategies to minimize this tax burden and plan for any tax payments that might arise from debt settlement. The tax implications of consolidating loans or engaging in debt management plans can also be discussed with a CPA.
Bankruptcy’s Influence on Employment Opportunities
A newer problem that not everyone knows about is that some employers look at job applicants’ credit histories. This can make it harder to find a job and pay off debt if your past payments don’t look good. The best approach is to have a steady job before you consider getting help from a debt relief service or filing for bankruptcy.
Think through these issues while negotiating the complexity of job and financial stability.
- Current Employment Security: Federal statutes guard against discrimination against bankruptcy, therefore safeguarding current employment security.
- Future Employment Prospects: Prospective businesses in areas stressing financial responsibility could regard bankruptcy filings unfavorably and find it more difficult to get new positions.
- Professional Licenses and Contracts: Some professions could include clauses stressing financial stability as extremely essential. Declaring bankruptcy could potentially impair your ability to maintain professional licenses or contracts.
- Security Clearance Jobs: While not a clear cut barrier, bankruptcy might make it difficult to secure or retain work needing security clearance.
- Credit and Trustworthiness Concerns: Employers handling financial resources could wonder about the judgment of people having a bankruptcy on their records, therefore affecting roles and chances for growth.
Seeking Professional Debt and Tax Advice
Talking to a respected, non-profit credit counseling firm for a free debt evaluation will help you decide on a debt relief program. Choose a reputable organization that legally must prioritize your needs. Look out for untrustworthy debt consultants who might recommend choices that would help them more than you would.
To present a better picture of your financial status from a tax standpoint, you should also see a tax CPA. This professional assistance is really important since it will enable you to avoid choosing actions that can compromise your financial situation or overlook chances for tax relief. Having a CPAs knowledge of your financial background and tax regulations, they may act as an advocate for your best interests, making sure any financial plan considers factors for reducing tax obligations and maximizing tax benefits.
This step can give you insightful analysis of several possibilities and guide your debt management choice. Setting a basis for financial health, a good counselor may also help you create a budget allowing you to live within your means while handling debt.
Understanding the Costs of Bankruptcy
Should you decide to file for bankruptcy, be advised that court expenses run about $300. Hiring a lawyer for a Chapter 7 bankruptcy can also run between $1,000 and $3,000; for a Chapter 13 bankruptcy, it’s roughly $3,000 to $6,000.
Particularly in cases of financial difficulty already present, these expenses can be rather taxing. When one considers bankruptcy as a possibility, one should take these expenses into account. Many lawyers provide a free initial consultation, which can be a chance to go over your matter and learn the possible advantages and expenses of declaring bankruptcy. By means of budget planning for these outlays, you can better control the financial effects of bankruptcy.
Financial issues go beyond the expenses of declaring bankruptcy, including attorney and court fees. A tax CPA can help you understand how these expenses might be handled in your tax returns, therefore possibly pointing up credits or deductions that might reduce your total tax load. Furthermore, they may help you foresee the handling of any tax returns or liabilities resulting from post-bankruptcy, therefore guaranteeing your readiness for your new financial life.
It is imperative to negotiate the complicated interaction between debt management or bankruptcy and tax consequences using a tax CPA. Their knowledge guarantees that decisions are taken knowing exactly how each action influences your financial situation—from a debt standpoint as well as in terms of possible tax savings or liabilities. Early in the process engaging a tax CPA can result in more informed decisions, possibly saving money and avoiding unfavorable tax consequences.
LBMC Wealth Advisors provides a helping hand for those with high net worth negotiating the complexity of financial changes including bankruptcy. Renowned for their knowledge across a range of vital services—accounting and tax services, estate and trust affairs, executive compensation planning, philanthropy, as well as insurance and retirement planning—our staff is ready to provide individualized, strategic counsel.
Our abundance of knowledge guarantees a thorough awareness of how every financial choice affects the overall view of your income and tax plan. We advise you to get in touch and talk about how we might help you to negotiate the obstacles ahead and assist your financial ambitions. For a partner committed to your financial well-being, contact LBMC Wealth Advisors today.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.