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How To Figure Out If Bankruptcy Is Your Only Option

Filing for bankruptcy can be a difficult decision. It may feel like admitting defeat and can have long-lasting effects on your credit and finances. However, for some people struggling with overwhelming debt, it may be the only viable option to get a fresh start.

This article will walk you through how to determine if bankruptcy is truly your best or only course of action. We’ll discuss alternatives to bankruptcy, different types of bankruptcy, and key factors to consider in your specific situation.

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Try Alternatives First

Before jumping straight to bankruptcy, make sure you have explored other options for debt relief. Here are some alternatives to consider:

  • Debt management plan – Work with a credit counseling agency to consolidate debt and negotiate lower interest rates or payments. This helps pay off debt faster without damaging credit scores like bankruptcy.
  • Debt settlement – The credit counselor negotiates with creditors to settle debts for less than the full amount owed. This can eliminate debt but will hurt your credit.
  • Borrow from 401(k) – You can take a loan from your 401(k) retirement account to pay off debt. Just be sure to pay it back on time.
  • Home equity loan – If you have equity in your home, you may be able to take out a home equity loan or line of credit to pay off other debts.
  • Balance transfer credit card – Transferring high-interest credit card balances to a 0% intro APR card saves on interest and helps pay down principal faster.
  • Sell assets – Selling valuable assets like a second car, jewelry, collectibles, etc. lets you pay off debt without bankruptcy.
  • Negotiate with creditors – Ask creditors to lower interest rates or allow smaller payments until you get back on your feet.

If these options don’t resolve your debt situation, bankruptcy may be your best recourse. But because filing for bankruptcy is complex, and must be done correctly to succeed, it’s generally unwise to attempt it without the help of an attorney experienced in bankruptcy proceedings[1].

Understand the Types of Bankruptcy

There are a few different types of bankruptcy to be aware of:

  • Chapter 7 – Liquidates most assets to pay creditors. Remaining debts are discharged. Best for those with low income or few assets.
  • Chapter 13 – Establishes 3-5 year repayment plan to creditors. Allows debtors to keep assets. Best for those with regular income.
  • Chapter 11 – Reorganizes business debt for repayment. Allows businesses to continue operating.
  • Chapter 12 – Similar to Chapter 13 but for family farmers and fishermen.

Chapter 7 and Chapter 13 are the most common bankruptcy filings for individuals. In a Chapter 7 bankruptcy, you will liquidate most assets to pay creditors, while remaining debts are discharged. It allows you to keep exempt assets like clothing, household items, and a limited amount of cash and equity in your home[3].

Chapter 13 bankruptcy establishes a 3-5 year repayment plan to creditors, allowing you to keep your assets as long as payments are made. It is best for those with a regular income to maintain the repayment plan[2].

Consider How Bankruptcy Would Affect You

Before deciding to file bankruptcy, think about how it could impact your life beyond just eliminating debt:

  • Bankruptcy stays on your credit report for 7-10 years, severely damaging your credit score.
  • It may be difficult to obtain credit, rent an apartment, or qualify for insurance with a recent bankruptcy.
  • You may have to give up property like a second home or non-exempt assets.
  • Bankruptcy filing fees cost several hundred dollars.
  • You’ll have to complete pre-bankruptcy credit counseling and financial education courses.
  • Your bankruptcy case may be “means tested” to determine if Chapter 7 filing is abuse.
  • Future wages can be garnished in Chapter 13 to repay debt.
  • Bankruptcy won’t discharge some debts like student loans, alimony, and taxes.

Everyone’s situation is different, so weigh the pros and cons of bankruptcy as they relate to your financial situation and what you want in the future. Whatever position you’re in, don’t panic. There is a solution. You can’t go to jail just because you owe someone money, so find a way to fix the problem[2].

Ask Yourself Key Questions

These questions can help you determine if bankruptcy is truly your best option:

  • Have you thoroughly explored and exhausted all alternatives like debt management and consolidation?
  • Do you have a regular income to maintain Chapter 13 repayment plan payments?
  • Can you afford the bankruptcy filing fees and attorney costs if hiring one?
  • Are you prepared for the 7-10 year credit damage bankruptcy causes?
  • Do you own exempt assets you want to keep like a home or car?
  • Is your debt mostly consumer debt rather than taxes, alimony, or student loans?
  • Are creditors threatening wage garnishment or lawsuits if you don’t pay?
  • Are you facing foreclosure, repossession, utility shutoff, or other critical deadlines?
  • Do you have more debt than you could pay off in 3-5 years given your income?

If you answer “yes” to most of these questions, bankruptcy may truly be your best remaining option, especially if you are facing imminent court judgments, foreclosure, or other severe consequences from creditors. If you can pay off your debts in 3-5 years, however, bankruptcy may be premature[2].

Understand the Bankruptcy Process

Here is a basic overview of what happens when you file bankruptcy:

  1. You complete a means test to determine Chapter 7 eligibility.
  2. You must complete approved credit counseling within 6 months before filing.
  3. Your assets are liquidated or surrendered, besides exempt property.
  4. The court prevents collection efforts and lawsuits from creditors.
  5. Debts are discharged except those exempt from bankruptcy.
  6. Your non-exempt assets are distributed to creditors.
  7. You must complete an approved personal financial course.
  8. Bankruptcy stays on your credit report for 7-10 years.

The bankruptcy process often creates a new sense of confidence, where people feel more comfortable with their financial affairs than when they began. Part of the reason is the two required personal finance courses. Chapter 7 bankruptcy also forces you to reflect on your financial situation. People who file Chapter 7 bankruptcy usually get more serious about budgeting, saving, and rebuilding their credit, using tools like credit builder loans and secured credit cards[6].

Consider Chapter 7 Bankruptcy Costs

Filing Chapter 7 bankruptcy comes with several costs to be aware of:

  • Attorney fees – The average attorney fee for Chapter 7 is $1,350.
  • Filing fee – The court filing fee is $338.
  • Means test fee – Debtors with income above a certain threshold pay a $78 fee.
  • Credit counseling – Pre-filing credit counseling costs around $50.
  • Financial education – Post-filing financial education costs around $50.
  • Other costs – You may have court reporter fees, appraisal fees, etc. if applicable.

While you can file Chapter 7 yourself, hiring a bankruptcy attorney is highly recommended to avoid errors. Attorneys fees vary by location, complexity of your case, and experience of the attorney. Be sure to understand their fees upfront before retaining them[4].

Move Quickly If Bankruptcy Is Needed

There’s a misconception that people file bankruptcy at the drop of a hat or when they still have other options. The reality for most is quite different. Some drain assets, such as their retirement accounts, that could have been protected by filing earlier. Others struggle for years before finally seeking bankruptcy relief after their financial hole has deepened. Don’t wait too long if bankruptcy is your best recourse[4].

The optimal time to file Chapter 7 bankruptcy is when you have more debt than you could reasonably pay off in 3-5 years, but before debt pushes you into complete financial ruin. This helps preserve assets and increases the chance of rebuilding your credit sooner. Talk to a bankruptcy attorney right away if you think you may need to file bankruptcy within the next 6 months. Timing it properly is important.

Rebuilding Credit After Bankruptcy

The long-lasting credit damage from bankruptcy can seem disheartening. However, steps can be taken to start rebuilding your credit score after bankruptcy:

  • Get a secured credit card and make payments on time.
  • Consider a credit builder loan to add positive payment history.
  • Become an authorized user on someone else’s credit card.
  • Limit new credit applications as you rebuild score.
  • Explain bankruptcy to future lenders by writing a goodwill letter.
  • Wait 1-2 years after bankruptcy to apply for a mortgage.
  • Get a co-signer when applying for credit too soon after bankruptcy.

Whichever procedures are applicable to you, the bankruptcy process can eventually free you from your obligations and give you a clean slate for rebuilding your credit and your financial life. The consequences are severe, but bankruptcy gives those who truly need it a chance to start over[5].

Just be sure to weigh all your options carefully before deciding if bankruptcy is truly your only viable path forward. Consider the alternatives, understand the types of bankruptcy, get advice from bankruptcy attorneys, and ask yourself the key questions covered here. While bankruptcy causes credit damage, it may still be the best option if you act quickly and start rebuilding credit after filing.

 

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