If you are struggling with debt and cannot find a way to pay it off, you may consider filing for bankruptcy. Personal bankruptcy can help people who have been going through financial hardship regain their lives by relieving them of the burden of accumulated debts.People have been relying on personal bankruptcies during recent years, but many don't know the basics about how it works or if it would be right for them. In this article, we will cover everything from what personal bankruptcy is to how it may affect your future should you file for it.
What Is Bankruptcy?Bankruptcy works by helping you lay down all debts and regain control of your life after financial hardships. It involves wiping out most (if not all) of your unsecured debt. Examples are credit card balances, medical bills, and personal loans from financial institutions. However, they must not exceed certain limits set by state law.In theory, the right to file for personal bankruptcy promotes the whole economy by providing people and businesses with a second chance to obtain credit and by providing creditors with a share of debt payback.Administration of personal bankruptcy cases is frequently handled by a trustee, an officer appointed by the Department of Justice's United States Trustee Program to represent the debtor's estate in the court. Unless a creditor objects in the case, there is usually very little direct communication between the debtor and the judge.
Who Can File for Personal Bankruptcy?Anyone struggling with overdue debts can file for bankruptcy. However, federal laws govern personal bankruptcies, so the rules and policies may vary depending on where you live. Even so, filing for personal bankruptcy may affect your ability to get loans or credit cards afterward. Therefore, you should carefully consider whether or not you are willing to take that risk.You also need to know what types of debts are eligible for bankruptcy proceedings. For example, personal bankruptcies only cover unpaid debt such as unsecured loans and credit card balances, but it does not include child support payments and taxes. An important consideration is that you should always consult with a bankruptcy lawyer before taking this action. Of course, it is possible to file for bankruptcy on your own, but we do not recommend this.
How Does Personal Bankruptcy Work?Bankruptcies come in different types, also known as "chapters".For most people, they would only consider two chapters: Chapter 7 and Chapter 13.Chapter 7 bankruptcy is the most common type of bankruptcy filed in courts. It involves selling your assets to provide repayment to your creditors. After being liquidated, your debts will be cleared.However, it is worth noting that important assets like your main home, car, goods, etc., will not be included in the liquidation process.Chapter 13 bankruptcy, on the other hand, does not include liquidation of your assets. Therefore, it is an option available for people with more stable finances.In this scenario, the court will obligate you to repay your debts over three to five years. Trustees will collect your payments, and your creditors will receive them.When Should I Think About Personal Bankruptcy?As mentioned above, bankruptcy is a tool to help people who cannot pay for their outstanding debts.So, if you keep falling behind on your mortgage payments, overdue invoices, or have loan bills constantly piling up, bankruptcy might be the right option for you. However, there may still be alternatives to this process, such as negotiating with your creditors about your debts.
Pros and Cons of Personal BankruptcyNo matter your circumstances, you should first consider the pros and cons of filing for bankruptcy. One of the most apparent advantages is that people would be able to get rid of their financial obligations through liquidation or debt repayment plans. Personal bankruptcy can also provide an opportunity to start afresh financially. It will show that they are willing and committed to controlling their finances by filing for bankruptcy.However, there are some disadvantages of personal bankruptcies, too—some being more obvious than others. For example, your credit score may be negatively affected by filing for bankruptcy. It will stay on your credit report for ten years, which means that it may be difficult to apply for mortgages or car loans during this period.Personal bankruptcies can also hurt your chances of getting a job. This is because some companies screen out applicants who have filed for personal bankruptcy in the past five years before contacting them.
Alternatives to Filing for BankruptcyPeople and businesses may desire to avoid personal bankruptcy at times. There are various alternatives that may be able to minimize your financial responsibilities.Negotiating with creditors without entering the courts can sometimes benefit both parties. Instead of receiving nothing, a creditor may agree to a repayment plan that reduces your debt or spreads your payments over a longer period of time. If you are unable to make your mortgage payments, contact your loan servicer to see what choices you have other than filing for bankruptcy. Forbearance, which allows you to stop making payments for a set length of time. Repayment plan designed to spread lower monthly payments over a longer period of time, are examples.Another option is loan modification, which would permanently change the conditions of your loan (such as lowering the interest rate), making it easier to repay. However, be wary of unsolicited offers from companies claiming to be able to save your property from going into foreclosure. They could be nothing more than con men.If you owe the IRS money, you may be qualified for an offer in compromise, which allows you to settle with the government for less than you owe. In some cases, the IRS also offers monthly payment plans to taxpayers who are unable to pay their tax obligations in full.
Is Personal Bankruptcy an Option?Unfortunately, personal bankruptcy is the best option for some people or businesses. If your obligations become too enormous to manage, you may be forced to liquidate all of your assets and face legal action for nonpayment or breach of contract. While bankruptcy can be devastating to your credit and reputation, it is a legal way to prevent the worst-case scenario indicated above.
If you file for bankruptcy, do you get rid of all your debts?Many sorts of unsecured obligations, such as credit cards or personal loans, can be renegotiated or erased through bankruptcy. Other debts not dischargeable in bankruptcy include:The United States Bankruptcy Code identifies 19 different types of debts that cannot be discharged in bankruptcy:
- Child support and alimony.
- Tax liens are used to collect unpaid taxes. However, some federal, state, and municipal taxes may be dischargeable if they are several years old.
- Debts for willful and malicious injury to another person or property ("Willful and malicious" indicates purposeful and without reasonable cause.)
- Debts for wrongful death or personal injury caused by the debtor's use of a motor vehicle while intoxicated or impaired by other substances.
- Condo association common/maintenance fees (or similar).
- Debts that you did not include in your bankruptcy petition.