Bankruptcy is considered by many as a easy solution to credit problems. To some, filing for relief is a basic part of financial strategy. They continue to accumulate debt, and when it can no longer be sustained, the plan is to simply file and start again. To others, declaring bankruptcy is a "last-choice" solution only to be considered in the most dire of circumstances.
While bankruptcy may be appropriate for some, there are alternatives to bankruptcy that can help reduce or eliminate debt without taking the drastic step of declaring a chapter 7 or chapter 13 bankruptcy.
And just what is bankruptcy? It's a legal way for those burdened by too much debt to "wipe the slate clean" by re-organizing their payment schedule and starting over again. Chapter 7, in fact, provides a legal foundation to NOT pay creditors and start anew. Chapter 13, on the other hand, re-affirms your commitment to pay your debts, but under re-negotiated terms and conditions. Chapter 7 and Chapter 11 are the two most common forms of bankruptcy used in dismissal or reaffirmation of consumer debt.
Each form of bankruptcy has it's own benefits, but each comes with far reaching consequences and requires serious consideration. Bankruptcy may be a viable alternative for some but before taking the drastic step of filing, it is wise to explore all options available.
Chapter 7 Bankruptcy
Chapter 7, or "straight bankruptcy" requires the debtor to liquidate all non-exempt assets to pay off their creditors in order of precedence. This form is generally used by those who lack sufficient income to cover outstanding debts after taking care of basic necessities. This is the most popular form because it allows the debtor to wipe the slate clean and get a fresh start. There are however, certain obligations that are not dischargeable, for example:
•Alimony and child support
•Back taxes and student loans
•Recently made purchases for substantial amounts
•Certain contracts involving titles or liens
Before considering this drastic step you should take an inventory of the types of debt owed. This form of bankruptcy should be considered an option of last resort after all other avenues have been pursued. Keep in mind bankruptcy either Chapter 7 or Chapter 13 doesn't come without some long-term consequences.
Chapter 13 Bankruptcy
Those who have too much disposable income to file Chapter 7, or have assets they want to protect, may want to consider filing Chapter 13. With Chapter 13 Bankruptcy, the debtor reaffirms their commitment to repay all or a part of their debts. This code allows the debtor to restructure their payments and set up a new payment schedule (usually 3-5 years) that is more manageable. This form of bankruptcy is used when the petitioner has property they want to keep like a Mortgage Loan that is about to be foreclosed on and other non-exempt assets that would be liquidated under chapter 7. Filing under Chapter 13 will cease all pending collection and foreclosure proceedings and allow the debtor to "catch up" on their payments and reinstate their original agreement.
Payments are made to a Trustee who disburses them in a manner called for by the court-approved plan. During this time the Trustee will have control over your finances and any credit-related matters will have to be cleared through him.
Considerations
Bankruptcy doesn't come without some negative effects. For example, filing puts the world on notice about your personal financial affairs. Since it's a civil court proceeding it becomes a matter of public record. In some cases, (i.e. Chapter 13) even your employer may be involved because this chapter requires wage garnishments from your paycheck to repay creditors.
Bankruptcy also stays on your credit report for up to ten years, and can hinder your ability to purchase a new car, buy a new home, find a job, establish new credit, or even buy insurance. You will also lose control over your finances since a Trustee will be appointed to oversee the completion of your filing. This in addition to the fact that filing doesn't necessarily get you out of all your obligations, bankruptcy is not the "silver bullet" solution that it's portrayed to be.
Declaring bankruptcy is a serious matter with much to consider before legally stating you're bankrupt. Our expert team of bankruptcy attorneys can help assess your situation, and explain ALL your alternatives, without making your situation worse than it is!