Should I Declare Bankruptcy?

Bankruptcy can be a great option for those experiencing serious financial issues. Don't be discouraged by the act of going bankrupt as it can provide you with the best means of moving forward and regaining financial control.

What is Bankruptcy?

Bankruptcy can be defined as the process by which businesses or individuals eliminate either a portion of their debt or their entire debt with protection from the federal bankruptcy court. There are two different types of bankruptcy: liquidation or reorganization. Most people think of Chapter 7 bankruptcy which is sometimes known as “straight bankruptcy” or the liquidation of your assets. After your non-exempt assets have been sold off in an attempt to repay your debts, the remainder of dischargeable debt is completely forgiven.

The alternative is to file for Chapter 13 Bankruptcy, which essentially reorganizes debt so consumers can afford to repay them. It does not discharge debts entirely, but instead provides a payment plan between 3-5 years using your income to pay them back. This option does not require liquidation of assets since debts are paid with your current income rather than the sale of your assets. Chapter 11 and 12 are also very similar, but they carry very specific requirements for those filing.

When is it the Right Choice?

After you review your financial situation, consult with financial advisors and attorneys, and carefully weigh your options, the final decision to file for bankruptcy is ultimately yours.  If you have pursued and exhausted all other available options, then bankruptcy may provide the fresh start you need.

If you have reached the point where bills are going unpaid, debt is mounting, savings have been depleted, and money management plans or credit counseling were not successful, then you may want to consider filing for bankruptcy. It is important to reassess your budget to see if you can find other solutions, but if belt-tightening and reallocation of finances doesn’t help, then insolvency may be your best option.

What are the Benefits and Drawbacks?

The most obvious advantage is that all non-exempt debts will be cleared giving you a new beginning. Often you retain a few assets that will help you move on after filing. In addition, creditors are prohibited from contacting you and collection actions must stop once you are assigned a Docket Number. However, this only applies if you communicate through a lawyer; it does not apply if you represent yourself. If you hire an attorney, collection agencies will no longer hound you for payment; they can contact your representation, but most wait until the court proceeding to discuss issues.

Despite the obvious benefits, there are important disadvantages to consider. You are only allowed to file once every seven years, and it will show on your credit report for 10 years. Your credit rating will be negatively impacted which can make it difficult to get credit or financing if you want to purchase a car or home. Some companies are willing to offer credit immediately following bankruptcy, but you will likely pay higher interest rates increasing both monthly payments and the total loan payout. If you are married, you also need to understand that should you choose to file separately, creditors will pursue your spouse or any co-signers to your loans.

How do I Apply?

There are a number of steps you must follow to ensure your petition is approved.

1. Assemble all financial information including your debts, income, assets, property, and monthly expenses. This needs to be as detailed as possible and contain your spouse’s information as well.

2. You must attend a credit counseling session through an approved agency within six months of submitting your petition. It can often be conducted via phone or internet for under $100 per session and usually takes 1-2 hours.

3. Once creditors are notified, there is an automatic stay on the accounts, and they will arrange a meeting with your trustee. Although creditors are not required to attend, both the filer and spouse must be present. You will be officially informed of the consequences of the action before you confirm proceeding.

4. If there are no objections, you will be required to complete post-bankruptcy counseling and confirm your attendance with your trustee. If you fail to do so, the debts will not be discharged.

Although you can file yourself, many people choose to hire a lawyer because it is very complex, and eliminates collection agency phone calls. Attorney’s fees generally range between $1,000-2,500 and must be paid in cash, so it is important to consider this option before your cash reserves are depleted. After you file your petition, approval is not guaranteed; however, if you have an experienced professional you are less likely to miss a step in the process.

Final Thoughts

The process can seem very overwhelming due to the complexities and numerous consequences. If you decide that declaring bankruptcy is the best option and fully understand how it will affect your financial situation, it can provide you with a new beginning. Don’t be afraid to ask for help and seek counseling from financial advisors to help assess your situation and determine the best course of action.