For most people, filing for bankruptcy is a last resort. It is often the best, last debt-solution option after they have explored other options, including negotiating with their creditors, seeking out credit counseling services and creating a strict budget to allow them to repay their debts at a more convenient pace.
People file for bankruptcy for a whole host of reasons. Some of the most common reasons a person will file for bankruptcy is:
- Financial problems are not temporary;
- Lost steady source of income (long-term unemployment);
- House is about to be foreclosed upon;
- Significant health debts have been incurred;
- Wages are being garnished;
- Paying for one credit card with another or putting necessessities on credit cards;
- Paying bills from retirement accounts; or
- Working multiple jobs and still financially overextended.
There is no doubt there is a negative social stigma associated with filing for bankruptcy. However, keep in mind that the purpose of bankruptcy is to give debtors a fresh economic start. Many who file for bankruptcy find the advantages to filing for bankruptcy greatly outweigh the disadvantages.
What is Bankruptcy?
Bankruptcy is a federal legal process that allows qualified individuals and businesses to discharge pre-existing non-exempt debts or to adjust their debt through a repayment plan that meets their specific circumstances and ability to repay.
A debtor will be allowed to file for bankruptcy if they are seeking to discharge their debt honestly (i.e. is not doing so for fraudulent reasons and is not concealing assets that can be used to pay off debts). However, support debts (alimony and child support) and other types of financial debts (student loans, taxes, fines) are non-dischargeable.
A bankruptcy automatically stays creditors from seeking to collect on pre-existing debts that are identified in the bankruptcy filing and which are not otherwise exempt from being discharged.
What Types of Bankruptcy Proceedings are There?
There are two popular types of bankruptcy proceedings for individual consumers: Chapter 7 (sometimes called liquidation bankruptcy) and Chapter 13 (sometimes called reorganization or repayment bankruptcy). Chapter 7 is used most frequently by consumers to completely discharge their debts and Chapter 13 is used by individuals whose incomes are too high to file for Chapter 7 relief and who don’t seek to completely discharge their debts, but rather to be able to pay their creditors on a schedule that leaves them able to continue operating.
In a Chapter 7 proceeding, non-exempt property can be sold to satisfy existing debts. At the end of the process, the debtor can rest assured that creditors cannot collect any debts that were discharged during the bankruptcy proceeding.
In a Chapter 13 bankruptcy, the debtor will present a repayment plan that if approved, will allow the debtor to repay the creditors over a slower period of time. Chapter 13 may be the better option for debtors who still have a income stream or non-exempt property that will allow them to continue to pay their creditors or are otherwise not able to file under Chapter 7.
What are the Advantages and Disadvantages for Filing for Bankruptcy?
You are tired of the calls and letters from creditors and filing bankruptcy can automatically stay these actions by creditors. You have reviewed and assessed your financial situation and you have more debt than you can ever afford to pay.
You have sought to negotiate with your creditors but to no avail and you have sought the assistance of counseling services. These are all important first steps in determining whether you should file for bankruptcy and whether you should file for a Chapter 7 or a Chapter 13 bankruptcy.
The prospect of completely discharging your current debt is always the most appealing option. However, if you still have a job, consider whether you simply would benefit from a repayment plan that allows you to repay your debt at a pace (usually for three to five years) that is more convenient for you.
Keep in mind also that filing for bankruptcy can continue to show up on your credit report (Chapter 7 filings stay for ten years and Chapter 13 stay for seven years) after you have filed for bankruptcy.
This can make it difficult to obtain credit cards and mortgages and may be viewed negatively by employers. As well, if you file for bankruptcy now, you may have to wait several years before you can file again.
Do I Need a Lawyer to File for Bankruptcy?
Filing for bankruptcy can be a scary prospect and is as involved as it seems. You have heard all the pros and cons about filing for bankruptcy. A bankruptcy lawyer can help you sift through the facts and the myths and help you assess your financial situation properly. A bankruptcy lawyer can also help you determine whether filing for a Chapter 7 or a Chapter 13 makes the most sense for you.