Bankruptcy

It is likely you have encountered the term “bankruptcy” in the context of large companies.

Often, large corporations file for bankruptcy when their expenses and debt outweigh the revenue they produce in a given year or number of years. Bankruptcy is a legal process that is governed by the federal government. All individuals and businesses that wish to file for bankruptcy must complete the legal process before they are approved or denied bankruptcy.

Filing for bankruptcy can be a viable option for individuals who possess a great amount of debt, but it is important to understand what bankruptcy entails, along with the benefits of declaring bankruptcy and the long-term drawbacks.

There are several kinds of bankruptcy, and before you consider the process, you should review the options for bankruptcy that exist. At the highest level, there are two types of bankruptcy: liquidation and reorganization. Within these two categories, there are options for both companies and individuals to either re-establish financial health or exchange all assets for cash to pay back lenders.

What is bankruptcy?

Bankruptcy is a process by which your debt is eliminated by a federal bankruptcy court. The benefits of bankruptcy are obvious, as individuals can achieve debt relief and essentially “start over.” However, it is crucial that you understand that a Chapter 7 bankruptcy will remain on your credit report for 10 years.

Additionally, some types of debt will not be removed with a bankruptcy. These include student loans, unpaid taxes, government debts and secured debts. In order to have a student loan removed, you would need to prove that you have suffered through an undue hardship, such as a disability that prevented you from earning money and repaying your loan. Secured debts are loans that were guaranteed in some form and therefore cannot be removed.

Types of Bankruptcy

Bankruptcy cases are filed in federal bankruptcy court. There are two main types of personal bankruptcy:

  • Chapter 13: Allows for people with a steady income to keep property, such as a mortgaged house, that might otherwise be lost in the bankruptcy process.
  • Chapter 7: This is known as straight bankruptcy and involves liquidating all of the assets that are not exempt.

Filing for bankruptcy is not something that you should take lightly. Bankruptcy information can stay on your credit report for 10 years, which can make it hard to get credit, get life insurance, buy a home or even get a job. Before filing, you should first consult other debt management options.

The Pros and Cons of Bankruptcy

Bankruptcy is a serious legally binding decision that should be well considered and used only as a last resort. It is not a substitute for responsible debt management and should not be treated as a way to start over economically. There are positives and negatives to the process that you should consider fully before filing for personal or corporate bankruptcy.

Pros of Bankruptcy

Bankruptcy can help you take the time you need to earn enough money to pay back your debt. Filing for Chapter 13 can allow individuals and couples to delay their debt payments and establish an arrangement that will stop collection attempts and re-organize their payment schedule. This usually involves smaller payments over a longer period. This can be very beneficial if you have experienced a medical issue or temporary disability that prevented you or your spouse from working, yet you are now able to work or will be able to work soon.

In a small number of cases, individuals can file for Chapter 7 bankruptcy in which any assets are liquidated and you are absolved from further debt. This is extremely rare and is usually only granted in cases where you are permanently disabled and unable to earn funds to repay your debts at any time in the future. However, if you are approved for Chapter 7, it will elevate the legal consequences of delinquent debt.

General benefits of bankruptcy include a reduction in stress from aggressive debt collection attempts, a pause in the accumulation of interest or fees associated with non-payment and an eventual second chance at financial stability.

Cons of Bankruptcy

Although bankruptcy can be a path toward financial recovery, it comes with stigma, a long legal process and in some cases, not all your debt will be included in your bankruptcy plan. For some kinds of debt, you will still be expected to pay on an established schedule regardless of your bankruptcy claim.

Additionally, a filing for bankruptcy will be listed on your credit report for at least a decade, which can prevent you from accessing financial resources such as loans, credit cards and jobs. If you file for bankruptcy and are married, your claim could affect your spouse as well. It is crucial that you discuss your plans to file with your spouse and seek debt counseling.

Alternatives to Declaring Bankruptcy

Before you decide on bankruptcy, consider the other debt management plans and relief options available. If you do not believe a debt you are currently responsible for is fair or legitimate, you may be able to take legal action to have the debt removed. However, if you know that you owe a debt but cannot currently make the payments you agreed to, the first step should be to contact your lender.

Often, the most important factor to a lender is to get the money back. Therefore, many banks and companies are willing to renegotiate the terms of repayment. This could include increasing the period you have to repay, reducing the monthly commitment or both.

In the event that your lender is not willing to negotiate, you may be able to obtain a consolidation loan. Consolidation is a process that has several steps and should be considered with care and caution.

Getting professional assistance to navigate your particular financial situation is the best way to avoid the need for bankruptcy. If you and your advisor do decide it is the best option for you, understand that you can get back on track with consistency and transparency.

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