Owing people and/or organizations money isn’t fun. Sometimes it’s necessary, sometimes it’s an accident, and sometimes it’s just poor decisions.
If your debt gets too out of hand and you feel like you’re drowning, you might want to consider bankruptcy.
It’s important for you to understand what’s involved and how it’ll impact you, first.
What is bankruptcy?
Bankruptcy is a court proceeding where a person or a business has their debt erased, reduced, or rearranged. There are many different types of bankruptcies, but Chapter 7 and 13 are the most common.
Types of bankruptcy
- Chapter 7 - You are released of your responsibilities to pay back your debts, However, the court will liquidate the majority of your assets to help pay for those debts. Exclusions vary by state, so make sure you look at your own state’s regulations.
- Chapter 9 - This is designed for municipalities when they can’t pay back they’re obligations. Detroit is the largest city to file Chapter 9.
- Chapter 11 - This is a reorganization of debt and is almost always used by businesses. Reorganization applies to the size of the payment, the due date of payment, etc.
- Chapter 12 - Designed for farmers and fishermen to help pay back the debt incurred in order to buy equipment.
- Chapter 13 - With Chapter 13 you establish a debt pay off plan. Develop said plan to pay off your debt or reduce it as much as you can in 3-5 years, any debt left over after that period is released.
- Chapter 15 - This is for people who have high amounts of debt in and out of the country.
Bankruptcy definitely serves a purpose. It’s a chance for people and businesses to get a fresh start. This can free up resources and will absolutely lift a weight off of your shoulders.
However, it comes at a cost. Bankruptcy hurts your credit and stays on your credit report for a long time. Chapter 7 bankruptcy stays for 10 years. Chapter 13 stays for 7 years.
This shouldn’t scare you away from doing it, though. Obviously, you should do what you can to avoid filing for bankruptcy, but sometimes there’s no other way. That’s why it’s important to talk with professionals.
When to consider bankruptcy?
People who end up in this position come by it on accident (medical bills) or on their own accord (poor spending habits). You should consider bankruptcy if…
- You have more debt than the means to pay it off.
- You’re using credit cards to pay for necessities.
- Your wages are getting garnished.
- You have creditors that won’t stop calling you.
- You’re digging into your retirement savings to pay for the debt.
- Financial Inventory - You take stock of what you have. Debt, assets, income, etc.
- Credit counseling - This is a must. You have to see a credit counselor to determine if there are any other ways, besides bankruptcy, to get you out of debt.
- Creditors meeting - The creditors that you owe money to have a chance to sit down with the judge and decide if they have any objections to what you are asking.
- Post-bankruptcy credit counseling - This last meeting is to make sure that you haven’t picked up old habits (if you got into debt on your own accord).
- Automatic stay - Once you file for bankruptcy, creditors and collection agencies are no longer allowed to pester you with phone calls.
- Creditors objection - If a creditor does not agree with the discharge of the debt you owe them, they can file an objection.
Bankruptcy is definitely a last resort solution, but it absolutely has it’s benefits. If you’re considering it, it’s important to know what’s involved and what you’re committing to.