Should You File For Bankruptcy?
No doubt you have heard of bankruptcy, but do you know how it works? Bankruptcy refers to a legal process when an individual cannot repay their debts to creditors. In order to seek relief from their mounting debts, the individual must secure a court order.
Bankruptcy is not to be confused with insolvency. While insolvency refers to a similar predicament of economic distress, bankruptcy is an actual court order that outlines how the borrower needs to deal with their unpaid obligations. Most often, dealing with those obligations will include selling off assets to creditors in order to pay part or all of the debt owed.
If you are wondering, “should I file for bankruptcy”, bear in mind that bankruptcy is a serious matter and should not be taken lightly. Keep reading to learn more about the pros and cons of bankruptcy, who can file, and what you should expect.
What Is Bankruptcy?
If you have racked up more debt than you can realistically pay off, you will want to fully understand the ins and outs of personal bankruptcy. The two most common types of bankruptcy include:
- Chapter 7: This type of bankruptcy allows liquidation of assets to repay creditors
- Chapter 11: This type of bankruptcy is centered around reorganization and allows the borrower to maintain all property but is subjected to paying unsecured creditors an amount equal to the value of non-exempt assets
Unsecured debt remaining at the end of a Chapter 7 filing is discharged. Similarly, unsecured debt in a Chapter 11 filing that remains at the end of the repayment plan is discharged. For both processes, the record of filing bankruptcy will stay on your credit report for up to 10 years.
Read more: Why Do People Go Bankrupt?
Who Can File For Bankruptcy?
You will want to do your research, speak to a financial advisor, and fully explore your options before resorting to filing personal bankruptcy. For some individuals, their sole remaining option is to file for bankruptcy.
Individuals who can file bankruptcy have likely already tried to negotiate a repayment plan with their creditors. Sometimes you can negotiate a deal for repayment of a specific sum or to pay the debt back over time, but a creditor may simply not agree. If that happens and you must make the payment, bankruptcy might be your only option.
Once your liabilities have far exceeded your income and assets, you will likely need to file for bankruptcy. If servicing your debt, which means paying the required monthly payments, exceeds the amount of income you make each month, then you are left with minimal options but to file for bankruptcy.
This situation leaves you at risk of incurring more debt and depleting your assets, leaving you in a worse situation unless you file for bankruptcy.
Pros Of Bankruptcy
Bankruptcy is a very serious process, but in many cases filing is the correct course of action. The advantages of filing for bankruptcy are:
- Once you file for bankruptcy, an automatic stay is triggered which prevents creditors from taking action to collect their debts. Moreover, this can halt evictions, utility shut-offs, foreclosures, and more
- You may be able to maintain your property
- Discharging debts can improve your credit, despite the fact that the actual bankruptcy remains on your record for up to 10 years
- Bankruptcy is an opportunity to learn healthier financial practices since credit counseling is required, helping ensure you avoid financial disasters in the future
Cons of Bankruptcy
The consequences of filing bankruptcy are severe and should not be taken lightly. The cons may include:
- Your credit score, report, and history will be seriously affected by the bankruptcy and this could make it nearly impossible for you to obtain a loan, credit card, car, or rent a house
- The psychological implications of bankruptcy are real and can come with a stigma coupled with feelings of failure and loss
- It is possible, specifically with Chapter 7 bankruptcy, that you will lose property like your home, boat, car, or other assets
What to Expect
Wondering how to file bankruptcy? Fortunately, this process can be handled by yourself or with the assistance of a bankruptcy attorney. While lawyers will charge fees for their services, their insight into bankruptcy and its best practices may prove to be worthwhile in the end. Consider what you can afford and go from there.
Your bankruptcy will be public record, and the entire process can take months to complete. You should not expect a quick, magical fix. Instead, prepare for a drawn out and complicated legal process.
Filing for bankruptcy might be an intense and disheartening process, but it is also an opportunity to start anew and begin the journey back toward financial health and independence.