Filing Bankruptcy, is it the Answer for You?
Before you even consider filing bankruptcy as a solution for your debt, learn as much as possible about the requirements in your state. You may not even meet the specifications for this type of solution. Each state has its own bankruptcy laws.
Different Types of Bankruptcy
Chapter 7: this is usually what individuals mean when they say they are going to file bankruptcy. This option involves the trustee selling off any assets that the debtor has that do not meet exemptions. This type of bankruptcy can be filed by individuals, business partners or corporations. Whatever portion of the debt that cannot be paid back through the sales will be discharged by the court. A person filing for Chapter 7 bankruptcy basically has no hope of ever being able to pay off his/her debts and wants a clean slate. There is a “means” test that must be met before you can qualify. A court appointed trustee compiles the assets and then sell them. Certain items are exempt from the sale (each state is different). Usually the debtor can keep his/her house and a portion of the value of his/her car. The trustee will sell off the assets and apply the money to the debts. If not all can be paid, some will be discharged and the debtor won’t have to pay them.
Chapter 11: this type of bankruptcy can be filed by individuals but is usually filed by businesses because once the filing happens the business can keep on operating and trying to work things out. It is reorganization rather than just a liquidation of assets. The company keeps control of the assets while the reorganization is taking place.
Chapter 12: this type of bankruptcy is for farm owners. It involves the debtor doing his/her best to work out some type of plan to pay all creditors. It allows the farmer to continue to work the farm and reorganize.
Chapter 13: this type of bankruptcy is similar to Chapter 11 but is for individual debtors. The person has to work out a 3 -5 year repayment plan. Most of the debt is repaid but some of it can be discharged. There are some limits on the dollar amounts of debt that can be involved.
Prior to considering filing bankruptcy, you should decide how you feel about using this remedy to satisfy your debts. When you successfully conclude your bankruptcy you will have either repaid your debts in full or an agreed upon amount or you will have had your debts discharged through the court. This means that you will no longer owe for the debt and the slate will have been wiped clean.
You should never consider filing bankruptcy without seeing a bankruptcy lawyer. Even though the debts are resolved, you will have your credit rating affected. You may not be able to borrow money to buy a car, buy a home or get good rates on credit cards for an extended period of time after the bankruptcy filing is completed. Filing bankruptcy should be a last resort. Filing bankruptcy still carries a personal stigma. It is a sign to others that the person has reneged on agreements made in good faith. Filing bankruptcy can even affect whether or not you get a job because people who declare bankruptcy can be considered unreliable (because they did not pay their debts).
If you don’t declare bankruptcy what do you do? Well, it your income is so small that there is nothing for anyone to get by taking you to court, you might just sit it out and hope it just goes away. The creditors might just decide to give you a pass and write off the debt. The term for this is “judgment proof” and it means you have nothing of value to take through a court proceeding. You should be aware they might later decide to take you to court if you become solvent again.
You can always use a debt management counselor to help you negotiate lower payments or to lower the total debt. It is always best to face your creditor and try to work out something. Although you won’t have the protections offered by filing bankruptcy, you will also not have a bankruptcy listed on your credit and this is a positive point. You will have to pay your debt in full and risk the repayment plan being cancelled if you fall behind in your payments. It is always a good idea to start building new credit after bankruptcy. This will help you to improve your credit score faster. These days bankruptcies are more common. Creditors are more forgiving. Building good credit will allow you to get back on your feet faster.
Filing bankruptcy is never a good idea. It should always be considered a last resort.