Debt sucks. It really, really does. The hardest part about it is that debt repayments can make you drown financially, making it impossible to keep above water with all the monthly debt repayments. Sometimes the only way to get out of that situation is to declare bankrupcy. Here is some more information from a reader about whether declaring bankrupcy would be the right option.
Chapter 7 vs. Chapter 13
So what is bankruptcy? There are two different filing options: Chapter 7 and Chapter 13 bankruptcy. Bankruptcy is essentially a legal status that says “I can’t afford my debts any longer”. This status must be applied for and granted by a court.
Chapter 7: Chapter 7 bankruptcy will require you to give up as many of your assets as possible to pay down as much of the debt at once as you can. This asset liquidation process can include things like property or investments, but personal possessions and clothes and vehicles are generally off-limits.
After liquidation occurs, your debtors get the funds raised, and the rest of your debt is expunged. You can only file for Chapter 7 bankruptcy once every seven years, and making a habit out of it is generally ill-advised.
Chapter 13: Chapter 13 bankruptcy is more about reorganizing your debts than liquidating assets to pay them off. You’ll get a period of time to figure out how to better organize your finances in order to pay off your debts. This “pause” so to speak, will prevent creditors from foreclosure or collections for the duration of the specified break period.
During this period, you’ll likely want to speak with a professional if you’re not sure how to reorganize your finances. A financial advisor may be able to help you come up with a plan to get your financial independence back and remove creditors from your life. If you’re on the east coast, you can compare the best financial advisors in New Jersey on Careful Cents.
Bankruptcy Doesn’t Expunge All Debt
More often than not, a secured debt like property is not going to be addressed in bankruptcy, and property liens can still be upheld by creditors even if you file for bankruptcy. Most bankruptcy filings occur because of unsecured debt; usually credit cards, personal loans, and the like.
Bankruptcy won’t eliminate your child support, either; nor will it expunge any alimony payments you’re responsible for. These are considered to be family debts and aren’t included in the bankruptcy filing.
Normally student loans aren’t covered by bankruptcy filings either, so you’ll still be responsible for paying the federal government what you’ve borrowed.
When Should I File?
Understanding when to file for bankruptcy can be tough; especially if you’re unfamiliar with the process or what the results will be. Essentially, you only want to file as a last resort. Bankruptcy looks pretty bad on a credit report and can have a major impact on your access to lines of credit in the future.
The first thing you’ll want to ask yourself is whether or not the debt you plan to file on is even covered by bankruptcy. As mentioned, student loans, secured debt, child support, and alimony aren’t going to be expunged through a bankruptcy filing. If you have mostly unsecured debt like credit cards piling up, and truly cannot seem to get yourself out from under them, only then should you consider filing for bankruptcy.
When you file for bankruptcy, you stand to lose a lot more than just your credit score. Chapter 7 requires the liquidation of assets, including your home, life insurance plans, pension or savings, and more. Any of these items could be liquidated to pay off your debt, leaving you with even less than when you started.
Rebuilding Damaged Credit
Bankruptcy will remain on your credit report for several years after you file; making it difficult even to obtain a low-limit credit card. However, this is an excellent time for you to start rebuilding your damaged credit and your financial history. After you file bankruptcy, it is vital to your future success that you take the time to better plan your personal finances.
The last thing you want to do is end up filing for bankruptcy twice in a decade. Take a look at what led you here; was it careless spending? Over-borrowing? Too many cards open at once? Other personal habits that led to a loss of income? Post-filing should be a time of reflection and planning for the future, so you don’t end up in the same mess you just pulled yourself out of.
Looking Ahead
Bankruptcy can be embarrassing, as all of your financial history (including mistakes) will be out in the open in court. The best way to avoid bankruptcy is to stay within your means. If you can’t reasonably afford to pay for one line of credit, why have two or three open at once? You’re only serving to dig yourself a larger financial hole; one that you may not be able to get out of should you keep digging.
If you find yourself struggling with finances, don’t be afraid to seek out help. There exist financial planning resources that can help you get back on track before you end up having to file for bankruptcy. Remember, bankruptcy should only be used as a last resort; it is not a way out of paying for all or your credit card purchases.
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