For people or businesses who are struggling to manage their debt, filing for bankruptcy is the last solution. Bankruptcy is not a solution to financial problems, but rather, it’s a way for debtors to reorganize their financial obligations. If you’re having a hard time managing your finances because of your debts, filing for bankruptcy could be one of your options. But before you talk to a bankruptcy lawyer, you must understand that filing for bankruptcy is an extremely complicated process and requires a great deal of planning.
Since bankruptcy is considered a last resort in managing finances, here are five things you need to consider before filing:
- Type Of Bankruptcy
There are two types of personal bankruptcy:
- Chapter 7 Bankruptcy – Liquidates your assets so you can pay your debts. In this type of filing, you can keep part of your home equity, vehicle, personal items that have value, pensions, social security, and other benefits. The assets included in the liquidation are properties other than your current residence, recreational vehicles, investment accounts, and bank accounts. The court will sell off all of your non-exempt assets by a trustee, and the proceeds will be distributed among your creditors. By the end of the process, most of your debts should be discharged.
- Chapter 13 Bankruptcy – In this type, you’re allowed to keep your assets, but you must agree to repay your debts over a specified period between three to five years. The trustee assigned by the court will collect your payments and distribute them to your creditors. Filing for chapter 13 bankruptcy helps you avoid foreclosure of your residence and payment of loans you cannot discharge like student loans.
Choosing which type of bankruptcy to file is not your decision alone. Some courts impose a means to test to determine whether you’re eligible for Chapter 7. In this test, they’ll evaluate your average income over the last six months and the median income for a household of your size in your state.
- Your Debts
Before you can file for bankruptcy, you need to have a complete list of your debts. Your debt can generally fall into two categories:
- Secured debts: These are loans backed up by collateral. In these cases, your creditor is legally allowed to seize and sell the asset agreed upon to repay the debt owed. Common examples are mortgages and car loans.
- Unsecured debts: Loans that don’t have any collateral or security interest. Common examples are credit card debts and medical bills.
When evaluating your debts, the court will consider secured debts to be of higher priority because your creditor is allowed to claim your collateral when you fail to pay.
- Other Alternatives
As mentioned earlier, filing for bankruptcy is a complex and tedious process. It should only be your last resort, after seriously consider alternatives to bankruptcy. Often, even if it feels impossible, your debts can be managed without having to file for bankruptcy. Here are some useful alternatives:
- Debt Counseling: Some companies offer debt counselling and management plans. A debt management plan is where you make regular payments to one designated company, and they pay your creditor on your behalf. Many companies offer lower interest rates and waive fees if you agree to debt counseling.
- Liquidate Your Assets: For many people with significant debt, liquidating their assets to make repayments is the best option. Gather all items and accounts that have value like cars, properties, stocks or bonds.
- Make Lifestyle Changes: To pay off your debt, you may need to make lifestyle changes. Small sacrifices like not spending too much on your wants, preparing meals at home rather than going out, and avoiding situations where you’re tempted to spend impulsively can go a long way.
If the alternatives have all been considered and ruled out, then it may be time to speak to a lawyer.
- Plan To Rebuild Your Credit
Filing for bankruptcy will have implications for years to come. When you file for bankruptcy, this will be noted on your credit report for seven to ten years, making it difficult to file for additional credit or loans in the future. However, if your file shows you’re using your credit responsibly and attempting to rebuild your finances, many creditors will take this into consideration.
- Understand Bankruptcy Comes With Costs
You’ll need to consult with a lawyer to file for bankruptcy. Some charge a flat fee based on how much debt you have, while others will invoice you a set hourly rate based on the amount of work they do on your case. You’ll be required to pay your lawyers even if you’re low on money. If you file for Chapter 7, you may spend an average of USD$1,000 to USD$1,200. The legal costs of filing for Chapter 13 are typically higher because payments are spaced out over several years.
Having a sizeable debt not only causes financial strain but can have mental, emotional and physical implications as well. For some, filing for bankruptcy is the ultimate solution to their debt problems, but for others it’s unnecessary. Before you think of filing for bankruptcy, make sure that you’re prepared to face the procedures and complexities of the process. You must be ready to let go of certain assets and make lifestyle changes to help manage your situation.