Struggling with finances is common, and you might end up in a difficult position for all types of reasons.
Medical debt, credit card debt, student loan debt, job loss, and other issues could mean a lack of funds coming in or simply too much going out. No matter what kind of debt issues you're facing, there are ways to get help and support.
The first goal is understanding how to evaluate if bankruptcy is the most suitable for you. While it can help many people get a fresh start or reorganize their debt, so they can move forward, sometimes it's not the right path to take.
Here is some essential information about your options, along with the merits and drawbacks of the bankruptcy process, so you can make the right financial decision.
There are two key areas to take into consideration when filing bankruptcy, which are Chapter 7 and Chapter 13. While they are both considered bankruptcy, they are very different in what they offer.
That's important to realize because you want to make sure you're filing the right type of petition with the bankruptcy court. Your attorney can help you choose the option that works for your situation.
Chapter 7 bankruptcy is available to both individuals and businesses. To be eligible to file for bankruptcy, though, there is a means test that has to be passed. This is income-based.
In other words, the person or business filing for Chapter 7 has to have an income low enough to pass the test. If their income is too high, they won't be able to proceed.
The process of filing and moving through Chapter 7 to have debts discharged typically takes around three to four months. The trustee can sell any nonexempt property in a bankruptcy case to help pay down debts. Keep in mind that student loan debt relief options usually aren't part of Chapter 7 bankruptcy.
Some property is exempt when filing bankruptcy, usually including a person's primary home, vehicle, and personal property, but there are exceptions.
The biggest pros of Chapter 7 bankruptcy include the following:
Cons of filing Chapter 7 are typically:
In contrast to Chapter 7 bankruptcy, Chapter 13 doesn't wipe out your debts. Instead, it allows you to reorganize them and pay them off on a set schedule that's agreed upon by you and your creditors.
This is often five years from when you file bankruptcy, and it is approved, but it can be shorter or longer, depending on your situation.
Chapter 13 is an option only available to individuals and is not an alternative for businesses. However, if someone is in business as a sole proprietor, they can still use this method of bankruptcy protection. There are limits on how much secured and unsecured debt a person can have, and if they have more, they will not be eligible.
The pros of Chapter 13 are:
There are cons to Chapter 13 bankruptcy, including:
Working with an attorney typically determines if bankruptcy is the most suitable choice for you. This can also help you decide which type of bankruptcy is best because every person's situation is different.
If you are burdened with a large amount of unsecured debt and a lower income, for example, Chapter 7 may be right for you.
If you have too high of an income for Chapter 7, or there are other circumstances that make it a poor choice for your needs, you can work with your attorney to file Chapter 13 instead.
Both options help individuals (and, in some cases, businesses) get the support they need to move past debt and credit issues to have a financially healthier future.
The benefits and consequences have to be carefully weighed before filing for bankruptcy of any kind. While it may appear as a great means to say goodbye to your debts and move forward, it's not always the right choice.
Even for people and businesses that would benefit from bankruptcy, there are still consequences for making this choice.
There are some significant advantages of bankruptcy for many people and businesses. The first advantage is the discharge of debt.
Whether you have your debt fully discharged in Chapter 7 proceedings or you pay for several years in Chapter 13 and then have your debt discharged, you'll have the opportunity to address financial issues and get back on track.
An automatic stay is another advantage of bankruptcy. This means you will no longer be sought by your creditors, collection agencies, and other parties trying to collect the debt.
And once they are notified that you have filed for bankruptcy, they have to stop pursuing you. That can give you an opportunity to breathe more easily and stop any harassment that is taking place, as well.
The opportunity for a fresh start is probably the biggest advantage of filing for bankruptcy. No matter what happened that caused you to develop significant debt, having a high debt load can wear on you over time. It can stop you from getting ahead in life, and in some cases, you may just keep getting further behind.
If you are burdened with significant debt and are unable to work, for example, you could have creditors pursuing you, and it may be challenging to get them to work with you to make lower payments, forgive some debt, or reduce your interest rate.
You may find yourself stranded in a vicious cycle that can feel hopeless to get out of, but having a fresh start through bankruptcy can change all that.
Even though there are many advantages to filing for bankruptcy, it is crucial to be aware that there are also disadvantages and consequences.
One of the largest disadvantages is the adverse consequence this will have on your credit score. If you file bankruptcy, you can expect your score to drop by a significant amount, making it challenging for you to obtain credit in the future.
However, if you are experiencing difficulty paying your bills and you are behind with your current creditors, it is likely that your credit score is already suffering.
With that in mind, your score may not drop as much as you expect with bankruptcy. That largely depends on what kind of credit score you have going into your bankruptcy, but you can and should expect a negative impact.
There will also be a public record of your bankruptcy filing, so if you are trying to keep that information private, you should know that it can be discovered.
Not everyone will know about your filing, but if they check public records for your name (or the name of your business), they will see the bankruptcy filing. That could impact your personal and professional opportunities.
The potential loss of assets is another disadvantage of bankruptcy. Most people can keep their homes and vehicle as long as they can continue paying for those things.
If you have other assets, such as a vacation home or second car, you may be required to sell those things to pay back your creditors. Understanding what assets you could lose is an important part of making a decision.
Before committing to filing bankruptcy, you should consider your other debt-relief options. Then you can be fully prepared to make an informed decision, which can help reduce the chances that you will have regrets later.
Here are the other debt-relief options you may want to look at before deciding whether bankruptcy is right for your needs.
Debt consolidation is usually done by getting a loan to pay off your current debt. While that may sound counterintuitive, since you are not really paying anything off that way, a consolidation loan is at a lower interest rate.
It puts all your payments into one loan, with a fixed payment, rate of interest, and pay-back period. That can make budgeting easier and help you decrease your interest rate and payment amount.
Debt management plans are generally handled through credit counseling services. For a fee, these services negotiate with your creditors on your behalf. They can often lower your interest rates and, in a few cases, may even get some of your debt forgiven.
Then you pay the debt management company a fixed amount every month, and they use that to pay your creditors. This can be very helpful but expect a negative impact on your credit score.
Negotiating with creditors is something you can do on your own, but it's not always effective. If you contact each of your creditors and request them to reduce your interest rate, defer payments for a set period, or make other concessions, they may or may not agree to do that. If they do, you can save money and potentially pay off your debt more easily.
By seeking financial counseling, you can learn how to manage your money and handle your debt better. This doesn't typically help you pay anything off immediately or discharge any debts.
If you want to avoid bankruptcy, though, financial counseling can help you find another way forward and plan for future financial success.
Seeking professional advice is the right choice when you are dealing with serious debt issues. That can help you decide if bankruptcy will be your best choice or if you should consider other options.
While you can make a choice on your own, professional guidance helps reduce the chances that you overlooked something.
The value of an informed decision cannot be overstated. It is best to avoid filing for bankruptcy if you have other options that could protect your assets and credit.
However, you also do not have to struggle with mountains of debt if you need bankruptcy help.
To make a well-informed decision, you and your attorney need to analyze all the data regarding your debt and income, as well as other financial considerations. That is the first step.
After analyzing information, you want to weigh your priorities and the goals you have. If getting out of debt by any means possible is the biggest goal, bankruptcy might be the right choice for your needs.
There are long-term financial implications to filing bankruptcy, but there are also implications to staying in debt for years, as well. Considering all the long-term issues is an important way to clarify what you choose and why.
It is essential to consult with a bankruptcy attorney who can review and discuss your options and give you advice on whether bankruptcy is right for you.
You can also find out which type you are qualified for and what you can expect from the process and its results. Filing for bankruptcy is a crucial decision that should not be taken trivially, but it can also be the best choice for your future.
If you have questions about bankruptcy or are considering it for your financial situation, contact us at Fleysher Law today, and get the support and information you need.
We are here to help you make the right decision for your financial future and determine if bankruptcy is the best course of action for your needs.