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To File or Not to File: When is Bankruptcy OK

Bankruptcy – just the word alone carries with it a dark stigma that many work struggle to avoid.

However, those who are in serious debt often consider filing bankruptcy as a way out of their current financial predicament.

Filing bankruptcy is serious business. Many experts consider declaring bankruptcy as one the five major life-altering negative events, up there with divorce, severe illness, disability and the loss of a loved one. As such, the decision to declare bankruptcy should never be taken lightly and should be avoided if at all possible.

How Bankruptcy Could Help

Essentially, bankruptcy can provide those who are in debt a perceived “fresh start” by cancelling much of their debt through a court order. When a debtor files for bankruptcy, creditors must stop their attempts to collect on the debts. In addition, bankruptcy could stop a pending foreclosure of your home, garnishment of your wages and threatened repossessions. Creditors also are unable to call, write or sue you after you have filed for bankruptcy.

While much of your debt can be canceled by filing for bankruptcy, you will still be on the hook for any debt that you can afford to pay back. In addition, if you file Chapter 7 bankruptcy, you will need to liquidate any assets you have in order to pay off some of your debt. Some assets are exempt from this liquidation, including cars, work-related tools and basic household furnishings.

In addition, there are debts that cannot be canceled by filing for bankruptcy. These debts include child support, alimony, fines, taxes and some student loan obligations.

Types of Bankruptcy

There are two types of bankruptcy for which you can file.

The most recognized is the Chapter 7 bankruptcy, which is total bankruptcy. Chapter 7 bankruptcy involves liquidating all assets, except for exempt property.

The second type of bankruptcy is Chapter 13 bankruptcy. If you still have a regular income and limited debt, this type of bankruptcy probably is more preferable over Chapter 7 bankruptcy. Through Chapter 13 bankruptcy, you received a structured repayment plan from the courts that allows you to pay off a good chunk of your debt. Your remaining debt often is canceled. Because you are working to pay off much of your debt, you often are able to avoid liquidation of your property by filing Chapter 13 bankruptcy.

The Aftermath of Bankruptcy

While bankruptcy might cause those drowning in debt to feel as though they have a fresh start, the reality is much harsher. Bankruptcy stays with you for life. When you apply for loans or even many jobs, you will be asked if you have ever filed for bankruptcy.

Additionally, a bankruptcy will stay on your credit report for a long time – 10 years for a Chapter 7 bankruptcy and seven years for Chapter 13 bankruptcy. Having a bankruptcy on your credit report will make it incredibly difficult to purchase a home, finance a car or obtain life insurance.

How to Avoid Bankruptcy

Often, many financial challenges can be resolved without filing for bankruptcy. The solutions are not easy by any means but often have far less severe repercussions that those associated with bankruptcy.

If you are drowning in debt and are considering bankruptcy, you should first consider the following options:

  • Discuss your financial situation with your bank to see if you can qualify for a consolidation loan that can reduce the number of monthly bills you need to manage and often can lower your monthly payments.
  • Contact your creditors to make special payment arrangements. Often, creditors will reduce your interest rate or lower your monthly payments in order to help you out. After all, your creditors would rather get paid than have you declare bankruptcy. You also might be able to negotiate a debt settlement through which you end up paying a portion of your total debt. This option will result in a significant blemish on your credit report but it will not impact your credit rating nearly has harshly as a bankruptcy would.
  • Reevaluate your spending habits. More than likely, irresponsible spending got you into your situation. Often, tighten the reins on your spending can help make a significant dent in your overall debt. In addition, you should eliminate many of your credit cards; however, hold on to those you have had the longest in order to maintain your credit history.
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