Business

When And How To File For Bankruptcy

Written by Ben Davis

In 2016, over 800,000 U.S. bankruptcies were filed, most of them personal bankruptcy (only 3% were corporate bankruptcies). And while that number may seem large, twice as many people filed for bankruptcy in 2008 at the onset of the financial crisis.

But even with so many individuals going bankrupt each year, most people are reluctant and even scared to go into uncharted territory and declare themselves bankrupt. That is completely understandable and normal, but sometimes, bankruptcy may really be your best option.

Ask yourself the following questions:

  • Am I frequently forced to use a credit card to pay for groceries, gas, and other basic necessities?
  • Can I only afford to make the minimum payment on one or more of my credit cards?
  • Do I receive calls from multiple bill collectors several times a week or even daily?
  • Is my monthly income too small to pay for necessities and make significant payments on my debts?
  • Am I already weighing debt consolidation as a possible alternative?

If you have to answer “yes” to even a couple of the above-listed questions, you probably owe more money than you can afford to repay and/or possess less in assets than you owe in debt. Such is the exact kind of situation where filing for bankruptcy makes sense.

Filing Chapter 7 Bankruptcy

Once you decide that bankruptcy is your best route, you still have to decide between chapter 7 and 13. Each form of bankruptcy has its own advantages and disadvantages. A good bankruptcy attorney can help you assess your situation to see which is a better fit, but below are some basic principles to keep in mind.

Chapter 7 is often dubbed “straight” bankruptcy because it works by simply liquidating your assets and selling them off to pay back as much of what you owe as possible. The proceeds will be distributed among your creditors according to a pre-set formula, and the bankruptcy should be complete within around 4 months’ time.

The benefit of a Chapter 7 bankruptcy is that it is not only simple and fast but many who file Chapter 7 can make a new start (even take out a home mortgage, for example) within a relatively short time span.

However, since nearly all of your possessions will be sold in a Chapter 7 bankruptcy, it may not be ideal for those who own a home, business, or anything indispensable that they cannot bear the loss of.

Filing Chapter 13 Bankruptcy

For those who own residential or business property that they strongly wish to retain even after the bankruptcy proceedings, Chapter 13 is a better solution than Chapter 7.

Chapter 13 bankruptcies are also called “reorganization bankruptcies.” This option allows you the extra time to pay back as much of your debt as possible (typically between three and five years). It disallows creditors from continuing to make collection calls for those debts during the “grace period” and then cancels all debts remaining at the end of the period.

To get court approval for a Chapter 13 bankruptcy plan, you will likely have to demonstrate you have a reliable income level, if not sufficient to keep up with your debt payments at present. But if approved, you will be able to go through the bankruptcy process without losing your properties as long as you abide by any stipulations that may be attached to the agreement.

Conclusion

If you cannot realistically pay back all of your debts in a reasonable amount of time, bankruptcy may be your best way out of a dire situation. Many Americans file Chapter 7 and Chapter 13 bankruptcies, so you are not alone. Approach bankruptcy with deliberation, but you need not fear it as if it meant the end of your financial existence.

About the author

Ben Davis

If hard hitting, factual news is what you are looking for, only Ben Davis has it.

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