Millions of Americans have faced serious debt problems in the midst of the economic downturn. Many of those have turned to bankruptcy to help solve those problems. What is bankruptcy, and what does it really mean to your future credit? Is bankruptcy ever really a good idea?
Let’s start with the basics
Before you consider bankruptcy, you should know exactly what you are getting into. You have probably already heard all the warnings about what it can do to your credit rating, how buying a house or getting any other line of credit will be more difficult, and a whole host of other scary things that could result from bankruptcy. But before you equate bankruptcy with “my life is over,” let’s talk about what it really means.
Bankruptcy is the legal term for someone (a company or an individual) who cannot afford to pay their creditors. When you file for bankruptcy, you are asking the court to believe that you don’t have enough funds, now or in the near future, to pay off your current debts. Bankruptcy then takes one of two general paths; your debt is either discharged or restructured.
Discharged debt, also known as a Chapter 7, is the most common bankruptcy filing in the United States, with over 63 percent of all those who file choosing this option. This means that you are not required to pay back what you owe; however, your creditors might be able to attach your assets, meaning that they can take away what you own in order to attempt to pay off your debt. For example, if you own property, your creditors might try to put a lien on the property.
Restructuring of debt, also known as Chapter 13, allows you to keep all of your assets but requires you to create a payment plan under which to pay off your creditors. This plan must be for five years or less. If you file Chapter 13 and then find that you cannot meet your restructured obligations, you can have your filing moved to a Chapter 7.
Can you avoid bankruptcy?
It is possible to avoid bankruptcy, but once you are in serious financial straits, it can be tough to get out of your situation. Here are a few tips that might help you stop the financial bleeding before you have to turn to bankruptcy:
- Negotiate like crazy. Talk to your creditors and ask what kind of payment plan they will accept. You might be surprised by how willing they are to work with you if it appears you really are trying to do the right thing with your debts.
- Sell property to pay off debts. If you have any property that could pay down your debt, consider selling it. But keep in mind that some property is exempt from bankruptcy, depending upon your state. That could include your home or your vehicle.
- Stop using credit. It can be tough to stop living with credit cards, but the only way to dig out of debt is to stop accumulating more stuff. Cut back on what you would normally use credit cards for and pay for purchases in cash.
Though you might be tempted to borrow money from friends and family, remember that you will still have to pay those loans back. That means that you will still have to restructure your financial life in order to keep everyone happy and keep yourself away from the brink of bankruptcy down the road.
When you should file for bankruptcy
Sometimes, things are just too much of a mess. If you have serious debts from serious problems, such as medical bills that skyrocketed, a home mortgage that is impossible, underwater, or unexpected expenses that snowballed, then filing bankruptcy might actually be a good idea. Speak to a qualified attorney with experience in bankruptcy law. One that comes to mind and has a very reputable image is Fried & Rosefelt, LLC, located in Bethesda, Maryland just north of downtown Washington, DC.
A reputable bankruptcy lawyer determines whether or not you can save the sinking ship, or whether it’s time to throw up the white flag and file for bankruptcy.
Other resources on bankruptcy:
http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter7.aspx
http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx
