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Bankruptcy – the ultimate form of debt relief. Virtually all of your debts are wiped out in an instant, giving you a fresh slate to reestablish your credit and regain control of your finances. While bankruptcy may seem like an ideal solution, it is usually reserved for the "worst case scenario." Before you get your heart set on filing, you need to know if you are indeed in that situation.
In this article, we will assess common reasons people file bankruptcy and appropriate times to consider filing. Then you can decide if this is the best choice for you. Is bankruptcy right for me? Let's find out…
How Bankruptcy Works
Simply put, filing bankruptcy means that you have declared yourself incapable of paying your past debts. You will have to go to court to meet before a judge, and then he or she will determine which debts of yours can be wiped clear. The creditors that you owe money to will be notified of your bankruptcy, and they will be forced to forgive your debts. Then you will only have to pay on whatever remains, if anything.
You may file bankruptcy as an individual or as a business, depending on how your money is allocated. Some forms of bankruptcy require more sacrifices than others, but they are all designed to clear you of debts you can never pay. Consider this a second chance of sorts, allowing you the opportunity to prove yourself again. It's your job to use that second chance to the fullest.
What's the Catch?
You can't assume that all of your debts will disappear with the wave of a wand. There has to be something more to it than that. Some of the downsides to bankruptcy include:
- Bad Credit: If you decide to file bankruptcy, you will completely destroy you credit. Getting a loan, a credit card, or anything else of that nature will be incredibly difficult for at least a year or two after you file. Sure, you'll hear stories of people who are bombarded by loan opportunities the week after they file because companies want to get in on the fresh credit. All of them will charge enormous interest rates though, and they will send you right back in the same financial situation.
- Waiting Period: Once you file bankruptcy, you cannot file again for another seven years. Ideally, you won't have to file at all, but this prevents you from getting another "clean slate" right away. If you sign up with one of the after-bankruptcy creditors and end up with a loan you can't pay, you're stuck with that on your credit for years. This ruins all chances of you getting a better loan or credit card in the future.
- Lingering Debts: Not all of your debts will be covered under your bankruptcy. If you have tax debt that is less than three years old, you're going to have to suck it up and pay it. If you have student loans of any kind from college, you will have to pay those as well. Don't assume that you will be debt free after your bankruptcy because you still may have bills to cover.
- Lost Assets: In many cases, the court will take possession of some of your property in order to cover part of the debt in the bankruptcy. This usually happens for people who have multiple houses, businesses, or cars in their name. If you have a vacation home, a boat, an RV, or extra vehicles in your name, you might not get to keep them.
Common Reasons to File Bankruptcy
Here are the top five reasons people file bankruptcy, according to Lawyers.com:
- Medical Expenses: I actually fall into this category. When I was 20, I got into a bad car accident that I didn't have insurance to cover, from a medical standpoint. If you're uninsured and faced with big doctor bills, it's easy for things to get out of control.
- Job Loss: After the economic crash of 2008, thousands of people in America were left unemployed. Job loss leads to unpaid bills which eventually lead to unpaid debts. It's hard to recover unless you get back to work right away.
- Improper Spending: Throwing your money away as opposed to saving it can easily get you into trouble. This is most often the case with younger people who do not have the experience to allocate their income properly
- Divorce: Divorce can double the bills in a relationship and unveil mutual debts. If you have ended a marriage recently, you may owe more money than you can pay back.
- Unexpected Disaster: Tornadoes, hurricanes, house fires, floods – all of these issues can impact your ability to pay your bills.
If you fall into one of those categories, this may be a solution for you.
Will Bankruptcy Even Make a Difference?
You have to figure out if bankruptcy will even make a difference for you in the end. I considered filing a few years ago because I was slapped with massive medical bills after a car accident. When I met with the lawyer though, he pointed out that even after the bankruptcy, I would still be living above my means. My regular bills a month added up to more than my income at the time, factoring in the cost of food and fuel. Thus before I could decide to file, I had to reassess the rest of my life and the bills I had to pay. Luckily, I started making more money, reducing my bills, and saving whatever I had left over. Now I'm paying off my debts without bankruptcy at all.
Consider all of your current bills plus the cost of student loan payments or tax installments. If you can logically pay all of those and still have some money left over, bankruptcy may put you in a better position. Otherwise, you'll be just as broke as you are now, but you'll have smashed credit to worry about on top of that.
So, Is Bankruptcy Right for You?
Before you settle in on the idea of filing bankruptcy, consider your alternatives. Maybe you'd be better off with debt consolidation or using the snowball method to pay off debts on your own. If you have already looked into those options and determined they didn't work, consult with a lawyer about your current situation. See if he or she recommends bankruptcy as the ideal solution, and then go about the steps necessary to improve your credit and your finances.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.