Bankruptcy, it is an option
Filing for bankruptcy is never a decision that should be taken lightly. While it can temporarily alleviate major financial distress, it is also the single worst thing you can do for your credit, often making it impossible to buy a home or car for years.
But in some cases, bankruptcy is one of the only options people face. The following are some things you should know about bankruptcy and whether bankruptcy is an option.
What is bankruptcy?
Bankruptcy is a legal proceeding handling by courts that works by temporarily (and sometimes permanently) stopping all efforts to collect debts from you. In many cases, bankruptcy can:
- Discharge you of legal obligation to pay your debts, giving you a fresh start financially
- Stop foreclosure on your home
- Prevent repossession
- Stop debt collection harassment
However, bankruptcy is not a quick fix. It will not keep you from paying child support, alimony, student loans, and other forms of debt. It also doesn't mean you automatically never have to pay back your debts.
There are two main types of bankruptcy most people file:
- Chapter 7. With Chapter 7, the courts handling your bankruptcy will take over a portion of your assets to pay bank debtors; after that, your debts are erased entirely. These include medical bills, credit card balances, and other types of debt.
- Chapter 13. This is the most common type of bankruptcy. In this case, rather than hand over your assets like in Chapter 7, you can keep them, and the courts will come up with a payment plan to repay the majority of your debts within the next 3 to 5 years. Once you have completed the payment plan, the rest of your debts are erased.
While this doesn't sound so bad to most people, keep in mind that recent laws have made it much harder to file for either form of bankruptcy. Before filing, by law you must undergo credit counseling. There is also an income limit for filing Chapter 7. Not only that, but Chapter 7 stays on your credit for 10 years, and Chapter 13 for about 7. It also costs to file for bankruptcy, usually between $150 and $200.
When is bankruptcy an option?
However, in some cases bankruptcy may be your only option. You may consider filing for bankruptcy when:
- You have already undergone credit counseling. If you've already tried to negotiate your debts and have been unsuccessful, bankruptcy may be a good option.
- Your liabilities are more than your assets. When you owe much more than you have, you may need to file bankruptcy. For example, this could occur when payments of your debts are more than you even make in a month.
- You are in danger of losing your home. If you want to hang on to your home, you must file Chapter 13.
- You have substantial medical bills. Medical bills are the number one cause of bankruptcy, even with insurance.
- You are behind on your debt payments, but you can still catch up if given enough time (which is what Chapter 13 allows you to do.)
Before filing for bankruptcy, it is important to pursue all of your options. You may want to speak with a bankruptcy attorney, which can help you retain more of your assets if you go through the process.
In some cases, bankruptcy is the only option for people with mounting debt and what looks like no way out.