Bankruptcy: The Last Resort

Bankruptcy is a financial tool of last resort. While it may seem like an attractive way to eliminate debt, stop the harassing collection calls, and financially “start over”, declaring bankruptcy will have an impact on your life for years. It’s important to understand how bankruptcy works and what declaring bankruptcy means for your future.

Chapter 7 Bankruptcy

If you can’t pay your bills now and are not likely to earn enough income to pay them in the near future, you may be eligible for Chapter 7 bankruptcy. The laws vary in each state, but Chapter 7 usually discharges most unsecured debts, such as credit card debt and medical bills. You will still have to pay back secured debt, like the mortgage on your home or the loan on a car, if a judge decides they are exempt. Chapter 7 also does not eliminate government student loans, taxes, alimony, child support, or any debts that are the result of fraud. Other than your home and car, any personal property of value will be sold by a court-appointed trustee in order to pay your creditors as much as possible.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is available for people who are still earning income, but can’t meet their monthly debt obligations. You can’t have more than $250,000 in unsecured debt or $750,000 in secured debt to qualify for Chapter 13. The court will appoint a trustee to sort through your finances and come up with a three to five year repayment plan. Your debts aren’t forgiven, but you won’t have to sell any personal property to pay them off. Instead, your creditors agree to accept the monthly payments decided upon by the courts without charging you any additional interest. Don’t expect the court to provide you with a generous monthly allowance, though, the goal is to pay your creditors as much as possible.

How to File for Bankruptcy

Before you decide to file for bankruptcy, you should talk to an attorney, so you fully understand the process and the implications it will have on your finances. If you choose to declare bankruptcy, you’ll have to fill out legal paperwork and file it with a bankruptcy court. You’ll also owe a filing fee, an administrative fee, and your attorney’s fee. Remember, you can only declare Chapter 7 bankruptcy once every six years, so you can’t just go back to old spending habits afterward.

Life After Bankruptcy

Most people only think about the freedom they’ll feel once bankruptcy takes care of their debt.  But bankruptcy follows you for the rest of your life. It stays on your credit report for up to 10 years, and can make it difficult for you to re-establish credit. Even after 10 years you may have trouble qualifying for a mortgage or car loan. You’ll have to check “yes” on every application that asks if you’ve ever declared bankruptcy, and you could be turned down for an apartment or a job as a result.

Bankruptcy provides a way out for people who cannot afford to pay off their debts, but it isn’t an end unto itself. Before you decide to declare bankruptcy, you should explore every other possible avenue for taking control of your financial situation.

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