Alt Title: When Is Declaring Bankruptcy the Right Financial Move?
If you’re facing financial hardship, you may be considering some desperate options – including declaring bankruptcy. Most people understand that the ramifications of bankruptcy can be extreme and far-reaching, but it’s not a death sentence, nor is it as terrible as people generally imply.
In fact, bankruptcy may be the best option available to you – especially if you have a good bankruptcy lawyer working with you.
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What Is Bankruptcy?
Bankruptcy is a legal practice designed to help consumers and organizations manage situations related to unpaid debts. When a consumer files for bankruptcy, they’re essentially claiming that they’re no longer able to pay their debts as originally intended. As a result of this process, consumers may be able to discharge some or all of their debts, but they’ll also forfeit much of their property and may be stuck with a lasting stigma on their credit report.
There are many different types of bankruptcy, but most people using the term “bankruptcy” are referring to one of two.
First, there’s Chapter 7 bankruptcy, which is sometimes called “straight bankruptcy,” since it’s more common and more straightforward. With Chapter 7, a federal court trustee will oversee the sale of any non-exempt assets you have – in other words, the majority of your personal possessions that aren’t essential for living and working.
The proceeds from these sales will be used to pay off your creditors. You should also note that Chapter 7 won’t discharge all your debts; you may still owe alimony, child support, student loans, and taxes.
There’s also Chapter 13 bankruptcy. In Chapter 13, you’ll be allowed to keep your property, as long as you come up with an acceptable plan for repaying your debt (partially or in full). Usually, this repayment plan spans 3 to 5 years, allowing you time to get your finances in order.
No matter what, there are some types of debts that cannot be discharged. Bankruptcy will be useful in discharging any non-exempt debts you have otherwise. However, the consequences can be quite severe.
Not only do you stand to lose much of your personal property, especially if you file for Chapter 7 bankruptcy, you’ll also have a mark on your credit report that will make it very difficult to secure new lines of credit, mortgages, and other financial products in the future. Bankruptcy will only leave your credit report after 7 to 10 years.
Alternatives to Bankruptcy
If you’re thinking about bankruptcy, you should also be thinking about some of the alternatives to bankruptcy. Many of these options can help you relieve your debts without forcing you to deal with the consequences of a full-fledged bankruptcy.
- Personal finance improvements. Your first line of defense is improving your personal finances. If you’re struggling to pay back your debts, there are a few smart moves you can make to get your money matters in order. For example, you can take on new side gigs and diversify your revenue streams to make more money and become more financially stable. You can also set up a strict budget, limiting unnecessary indulgences while prioritizing the majority of your income for paying off your debts.
- Negotiation. Have you tried negotiating with banks and other financial institutions? Sometimes a phone call is all it takes to restructure your debt and come up with a better repayment plan. These institutions don’t want you to file for bankruptcy; they just want you to pay back what you borrowed. To that end, they’ll likely be willing to work with you to come up with a better repayment plan.
- Credit counseling. If you’ve tried negotiating with these institutions to no avail, you might consider trying credit counseling. In this arrangement, you’ll work with a professional counselor to analyze your current debts, look at your current finances, and come up with a plan for the future.
- Debt consolidation. You may also benefit from debt consolidation, the practice of bundling all your debts together into one, much more manageable account. Oftentimes, you’ll be able to secure a fixed interest rate and a relatively low rate, so you don’t have to worry about your debt spiraling out of control anymore.
When Bankruptcy Is the Best Option
So when is bankruptcy the best option?
Put simply, bankruptcy is the best option when you’ve exhausted all the other options. If you’ve tried to pay your loans back the traditional way, if you’ve negotiated with your creditors, and if you’ve tried to consolidate your debts, only to end up in the same hopeless situation, bankruptcy could be your best choice. There are also some niche examples of situations where bankruptcy is even more personally advantageous. Be sure to discuss with a bankruptcy lawyer whether bankruptcy is the best move for you; a professional will be able to offer much more detailed and personalized advice, based on your unique circumstances.
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