How to Decide If Bankruptcy Is Right for You[yoast-breadcrumb]
How to Decide If Bankruptcy Is Right for You
Bankruptcy can seem like a scary, drastic move. But sometimes it really is the best option to get out from under a mountain of debt and get a fresh start. This article will walk you through how to decide if declaring bankruptcy could be the right choice for your situation.
First, Understand the Different Types of Bankruptcy
There are a few different “chapters” or types of bankruptcy you can file for. Here’s a quick overview of the main ones:
- Chapter 7 – This is known as “liquidation” bankruptcy. It wipes out many of your unsecured debts like credit cards, medical bills, personal loans etc. But you may have to give up some assets to pay back as much debt as possible. Usually best for people with low income and not a lot of assets.
- Chapter 13 – A repayment plan where you get 3-5 years to pay back debt. You get to keep assets like your home and car while slowly repaying some debts. Best for folks with steady income who need time to catch up.
- Chapter 11 – Reorganization type of bankruptcy mostly used by businesses. Lets them continue operating while working out a debt repayment plan.
There are more details and nuances to each type, but this gives you an idea of the main options. Talk to a bankruptcy attorney to understand which chapter might fit your situation best.
Consider If Bankruptcy Makes Sense for Your Situation
Bankruptcy can provide a lot of relief – but it also has serious long-term impacts, like damaging your credit. It’s not right for everyone. Look at factors like:
- Your debt load – Bankruptcy makes the most sense if you have a large amount of debt you realistically can’t pay back. As a rule of thumb, $10,000+ in debt is often a level where bankruptcy could help.
- Types of debt – Some kinds of debt can’t be discharged through bankruptcy, like student loans and child support. If most of your debt falls into those categories, bankruptcy may not solve the problem.
- Your income – For Chapter 7 bankruptcy, you have to pass a “means test” showing your income is under a certain threshold. Higher earners may have to file Chapter 13 instead.
- Your assets – Chapter 7 requires liquidating some assets to pay back debts. If you have valuable property you want to keep, Chapter 13 may be better.
- Your ability to repay – If you have the income to eventually repay your debts, Chapter 13 lets you reschedule payments over 3-5 years rather than erasing debt.
Really take time to understand your full financial situation and what kinds of debt relief bankruptcy would (or wouldn’t) provide.
Consult With a Bankruptcy Attorney
Speaking with a bankruptcy lawyer is absolutely vital before making any filing decisions. Here are some key reasons why:
- They can advise if you qualify for Chapter 7 or need to file Chapter 13 based on your income, assets, and debts.
- They ensure your paperwork is 100% accurate – mistakes can cause your case to be dismissed and leave you worse off.
- They represent you in court and at creditors meetings, handling the legal side.
- They help protect assets like retirement accounts that can be shielded from creditors.
- They know all the intricacies of what debts can and can’t be discharged based on your state’s laws.
Many lawyers offer free initial consultations, so take advantage to get professional advice tailored to your situation. They can clearly explain your options, chances of approval, and what to expect from the process. It’s well worth the investment.
Don’t Wait Too Long and Make Things Worse
A big mistake many people make is draining all their resources or taking extreme measures to pay off debts rather than filing for bankruptcy sooner. For example:
- Cashing out retirement accounts early – those funds would have been protected in bankruptcy but are now lost.
- Using up all savings trying to keep up with payments – that money could have been saved by filing earlier.
- Taking out costly payday loans or racking up more debt on credit cards. This just digs the hole deeper.
Basically, don’t make things worse with temporary band-aid solutions. Evaluate if bankruptcy makes sense sooner rather than later.
Know the Consequences – It Stays on Your Credit Report for 10 Years
Be aware – a bankruptcy filing remains on your credit report for 10 years from the date it was finalized. It will severely damage your credit score at first. That will make it much harder to qualify for loans, credit cards, mortgages, and other financing.
However, the impact lessens over time, and your credit can start to recover in as little as 1-2 years. You can eventually rebuild credit by responsibly managing secured cards, personal loans, or “credit builder” products. But 10 years is still a long period to have that bankruptcy mark on your report.
The Pros – Bankruptcy Stops Collections, Wipes Out Debt, and Gives You a Fresh Start
Despite the negatives, bankruptcy can be the best path forward for many people in dire financial straits. Don’t be afraid to consider it. Some potential pros include:
- Your debts can be reduced, restructured, or even eliminated. This provides major financial relief.
- Collection calls, lawsuits, wage garnishment, and repossessions stop immediately. You get breathing room.
- Future wages and new assets acquired after filing are protected from creditors owed money before the bankruptcy.
- Bankruptcy allows you to “reset” your financial life after ending unmanageable debt. You can rebuild in healthier ways.
So in many cases, bankruptcy is a chance to press restart and recover – even if the credit score impact takes time to fade.
Alternatives to Bankruptcy Do Exist Too
Before deciding if bankruptcy is your best path forward, also spend time researching alternatives like:
- Debt management plans through non-profit credit counseling agencies – They help negotiate lower interest rates on debt and set up monthly payment plans. This lets you repay debt over time without filing bankruptcy.
- Debt settlement/negotiation assistance – These services negotiate directly with creditors to settle your debts for a fraction of the amount owed. You pay a percentage of the reduced settlement amount in a lump sum.
- Debt consolidation loans – These combine all your debts into one new loan, with the goal of lowering your interest rates and monthly payments. But you still have to repay the full amount owed.
- Selling assets – For some folks with assets like a second home, bankruptcy may be avoidable if you can generate funds by selling assets to pay down debts.
- Borrowing money – As risky as it sounds, personal loans from friends/family or home equity loans can provide funds to repay debts at lower interest rates than credit cards or medical bills.
- Balance transfer credit cards – These cards allow you to transfer high-interest credit card balances to a new card, often with a 0% intro APR for 12-18 months. This reduces interest costs in the short-term.
- Mortgage refinancing – You may be able to replace your existing home loan with a new one that lowers your monthly payment or interest rate. This frees up cash that can go toward other debts.
- Changing budgets/lifestyles – In some cases, bankruptcy can be avoided by major lifestyle changes like moving to a cheaper home, downsizing expenses, or taking on a second job.
Don’t jump into bankruptcy without at least examining these alternative debt relief strategies. Each has pros and cons to weigh carefully.
Talk to a Credit Counselor If Unsure
If you still aren’t positive whether bankruptcy is your best path forward after reading this article, speak to an accredited nonprofit credit counseling agency like NFCC.org.
Credit counselors can:
- Help you create a household budget to manage expenses.
- Explain your options like debt management plans.
- Offer advice on avoiding bankruptcy if possible based on your situation.
- Recommend reputable bankruptcy lawyers if you do need to file.
They provide customized guidance on managing debt and deciding if bankruptcy is truly your best recourse. It’s always wise to discuss your specific situation with a professional.
Conclusion – Do Your Research, Then Make the Best Choice for Your Situation
Bankruptcy is a major decision with long-lasting impacts – both positive and negative ones. While it can be the right choice when you’re buried in debt, it requires caution and careful consideration.
Hopefully this article provided a helpful overview of factors to weigh when deciding if bankruptcy is your best path forward. Speak to bankruptcy lawyers and credit counselors. Look at your full financial picture. Understand all the options.
With the right information and professional advice, you can make the optimal choice to resolve your debt in a way that sets you up for future success. The process may be painful, but a fresh start is possible.