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.
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 Bankruptcy
No 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.
Final Thoughts: Step by Step Guide to Personal Bankruptcy in America
If you are struggling to make ends meet, keep in mind that plenty of resources are available for you to get back on track.
In some cases, filing for personal bankruptcy may be an option worth exploring with one or more qualified professionals before making any decisions about how best to proceed. Also, it has lasting financial consequences such as asset liquidation and bad credit that will affect your financial decisions for a long time.
Therefore, you should consider all the options you have available before you proceed with bankruptcy. In addition, make sure to maintain documentation such as pay stubs and bank statements to understand your current financial situation better.