We live in a world where being in debt is seen as commonplace and the cost of living means that it is easy for your outgoings to get out of control.
To help combat this, more and more Americans are taking out loans and credit cards, accessing increasing streams of credit, and ending up with out of control debt.
One of the hardest things about this is breaking the cycle, and sometimes a clean break is the only solution.
While repayment plans and programs can go some way to helping, sometimes the only solution available is bankruptcy.
What Is Bankruptcy?
When an individual or a business is unable to repay their outstanding debts, they may begin the bankruptcy process.
This process involves the debtor filing petition and requires evaluation of the assets of the debtor. These assets may be used to pay a portion of the outstanding debt and reduce the overall amount.
Who Can Benefit From Bankruptcy?
Bankruptcy can offer a fresh start to a business or person with out of control debt.
If there is no chance of repayment from the debtor, the creditor can also benefit by obtaining a percentage of the liquidated assets.
The slate is wiped clean, and this can be the best solution for those who are simply falling further and further into debt with no hope of clawing their way back out.
That said, bankruptcy is not a get-out-of-jail-free card. And it is not a free ride. Bankruptcy is a difficult and expensive process that can have a long-term impact on your financial health.
Alternatives to Bankruptcy
Before filing for bankruptcy, consider all available alternatives, such as debt consolidation, debt management, or debt settlement.
Be aware there are many companies and organizations that specialize in debt management. Some of these charge outrageous fees that will not help you get out of debt any more quickly. I strongly recommend trying a DIY debt consolidation option first, or working with a non-profit organization.
You can also try to find ways to restructure or reorganize your debt payments. One of the most popular debt reduction methods is the debt snowball, which can help people get out of debt more quickly.
Some people may also find ways to increase their cash flow to pay off debts. This could include making more money, taking on a side job, selling belongings, and other creative ways to raise cash.
Bankruptcy should only be an option after you have first expended all efforts to get current on your payments.
That said, bankruptcy can be inevitable in some circumstances and is sometimes out of your control.
How Does Bankruptcy Work?
The federal courts are responsible for handling bankruptcy cases throughout the United States.
A bankruptcy judge makes the final decision over whether the debtor is allowed to file, and whether a discharge of debts is permitted.
In extreme circumstances, a trustee may be responsible for the administration to act as a representative of the debtor’s estate during the proceedings, and the United States Trustee will appoint this person.
Getting Discharged From Bankruptcy
Part of the bankruptcy process involves the debtor receiving a discharge order. This means that they are no longer legally required to pay any of the debts which exist on that order.
The debtor is freed from the burden of the debt and means that any creditors can no longer take any type of activity to collect the debts, including sending letters or making phone calls.
In essence, receiving a discharge will absolve the debtor of any personal liability for the debts.
Remember that not all debts will qualify; items such as tax claims, personal injury debts, debts to the government and child or alimony support will not be covered; there is no automatic right to a discharge.
Student loans can also be very difficult to discharge through the bankruptcy process.
Creditors also have the right to object to a filing. Creditors will receive a notification when the bankruptcy is filed in court and have a certain amount of time to object and file a complaint in court.
This action will then result in enforcement of a lien or the filing of an adversary proceeding to help recover any monies owed.
Types of Bankruptcy Filings
When filing in the United States, your bankruptcy will fall under one of the chapters of the Bankruptcy Code, depending on your needs.
This involves liquidation of assets, and will apply to any individuals or businesses who have very few if any, assets. Chapter 7 is a popular choice for those individuals looking to remove unsecured debts such as medical bills or credit cards. Assets may include second homes, vehicles, family heirlooms including stamp or coin collections, and any bonds and stocks. The debtor will not be required to pay any part of the debt under a Chapter 7 filing if there are no assets or property.
Chapter 11 bankruptcy deals with individual companies or organizations. These are most often filed by businesses, with the attempt to organize and restructure the company and become profitable. It gives businesses breathing space, offering a chance to step back, cut any costs, find new ways to increase revenue and come up with innovations to increase profitability.
One of the significant benefits is that the business can carry on with day-to-day operations, allowing money to be made at the same time as a debt repayment plan is being worked out and implemented.
Filing of Chapter 11 is sometimes done by individuals, though this is extremely rare.
Chapter 13 is a debt repayment program which offers lowered debt covenants or payment plans. They are available to individuals who are deemed to make too much money to qualify for a Chapter 7 filing. A debt repayment plan is worked out, and this allows the creditors to be repaid, the debtors to keep their property, and an affordable way to tackle debt.
Chapter 15 was added to the other options to help deal with cross-border cases which involved assets, creditors, debtors, and any other involved parties who are in more than one country. It is filed in the home country of the debtor but can deal with multiple borders.
Other Types of Bankruptcy Filings
Chapters 7, 11, and 13 are the most common types of bankruptcy. Another, Chapter 12, allows “family farmers” and “family fisherman” to file for bankruptcy. Chapter 12 does not require the family farmers or fisherman to liquidate all assets, and provides some additional protections.
The discharge of a Chapter 7 bankruptcy is usually granted four months after the debtor has filed a bankruptcy petition. With any other types of bankruptcy, the discharge will occur whenever it is practical.
Pros of Bankruptcy
There are several advantages to choosing bankruptcy:
- It helps to remove any stresses and uncertainty which may come with dealing with creditors and juggling multiple accounts. The process can be streamlined and simplified.
- The admin will be taken off your hands; once you have had your bankruptcy order approved, you will be provided with an administrator to take charge of all payments and correspondence with your creditors.
- There will be the option to pay back creditors a lower amount than they are owed
- Offers an end to your debt woes; once the deal is set, your creditors will not be able to change their minds.
- Once the debt has been discharged, your debts may be written off, and creditors made to stop chasing you for any money which may still be owed.
- You are free of your legal obligations to the creditors.
Cons of Bankruptcy
As with everything, there will be disadvantages to bankruptcy, and some drawbacks are:
- Loss of assets – choosing bankruptcy will mean that you lose any assets of value, including your home. If this contains equity, you may be required to sell your house.
- If you own a business, there is the risk that your business will be sold, and any employees made redundant.
- You could lose your home if you are renting if you are also behind on any repayments. Renting a home may be more difficult, as some landlords will not rent to anyone who has been declared bankrupt.
- The process will cost money – any fees for court or services will be taken from your assets.
- If you apply for credit for over $500, you will be required to declare your bankruptcy status. This means you are more likely to be rejected.
- You must be upfront and honest with all financial affairs and could face criminal charges if the examiners uncover any irregularities or anomalies.
- Some public office positions and professions will be off limits to you, such as accounting and legal professions or becoming a solicitor. You will also be restricted and prevented from serving as the trustee of any pension fund or charity.
- You will not be permitted to be a company director or trade under any name other than your own.
- Your bankruptcy will be available on the public record for anyone who wishes to find out.
- Some debts do not count and will not be written off. These may include court orders, child support, fines, debts incurred as the result of fraud, or any obligations to secured creditors.
- If you have joint debts, creditors will still be able to demand payment from the non-bankrupt party.
- Even after you are discharged as bankrupt, your assets may still be administered by the Official Receiver or Trustee.
- Going bankrupt will lower your credit rating. You will find it very difficult to get credit even after your debts have been discharged. Your credit rating will be affected for seven years.
Bankruptcy Can Wipe the Slate Clean, But it Should be the Last Option
Bankruptcy is a complex process and can be a way for both individuals and businesses to wipe off debts and start with a clean slate.
It offers a chance for businesses to regroup, re-evaluate and come back stronger than ever, rather than face financial ruin and have to lay off employees.
Individuals will be given an opportunity to rebuild their credit and lives, and creditors will have the chance to recoup some of their costs by gaining money from the liquidated assets of the debtor.
There are considerations to take into account, as you may lose your home and be forced to give up assets. But bankruptcy does open the door to financial freedom and the chance to start again.