Understanding Bankruptcy

Bankruptcy is a financial protection provided by the federal government to assist businesses and people who are unable to repay their debts. A majority of individuals who opt for filing bankruptcy select between Chapter 13 (repayment) bankruptcy and Chapter 7 (liquidation) bankruptcy. The kind of bankruptcy filed by individuals determines whether or not you have to make payments or sell off your assets. It can also ascertain the amount of debt that will get cancelled.

The bankruptcy laws in the United States allow a new start to people overwhelmed with debt. It can help clean debt via discharge and change the terms of owed amount or make feasible repayment plans for debt.

Most of us are afraid of bankruptcy, but it can help bring about financial relief that is really needed. There is some level of stigma attached to the concept of not paying your debts and taking the protection offered by bankruptcy, but it is important to remember that the laws have put in place for a reason and that there is no actual reason for people to feel ashamed.

When should you opt for bankruptcy?

Filing for bankruptcy is a major decision and one has to put in some serious thought before opting for it. People who think that they may need to file for bankruptcy may first consider talking to a financial expert first.

Bankruptcy is a good option for those who are overwhelmed by debt. However, all should speak with a non-profit credit counselor before pursuing bankruptcy as also to find alternatives. It may be noted that the law requires people to meet with a non-profit credit and budget counselor for review of the expenditure habits.

  • People who have resorted to taking out payday loans or car title loans, or are thinking of raiding 401 (k) account to repay the debt, or are withholding the payment of income taxes, may have sufficient debt that can permit the filing of bankruptcy.
  • People may opt for bankruptcy after a life-changing event. Losses in income or varied medical crises can make recovery of financial health really difficult without protection via bankruptcy.
  • Anything which indicates the debt to be so large that it cannot be managed via the current income levels can make bankruptcy a practical option.

When should you not opt for bankruptcy?

  • People who have received a Chapter 13 discharge in the last 6 years, or Chapter 7 discharge in the past 8 years, cannot avail of a Chapter 7 bankruptcy discharge. Similarly, those who have received a Chapter 13 discharge in the last 2 years, or Chapter 7 discharge in the past 4 years, cannot avail of a Chapter 13 bankruptcy discharge
  • Individuals with high incomes may not be able to avail of debt alleviation via bankruptcy. Such people may instead file a type of bankruptcy that permits restructuring of their debt, thereby allowing for easier debt repayment but not completely erasing the debt.
  • People who can repay debt by reducing expenses should not file for bankruptcy. Instead they should negotiate lower interest rates, payment plans, etc., and repay the debt.
  • People without any assets at risk need not file for bankruptcy since there are no assets that can be used to collect as debt.