The market has been flooded with credit card debt consolidation offers from companies like Credit 9. If you are unable to make good on your payments to creditors, have no available means to consolidate debt, and have no other sources of income, you’re probably thinking about declaring bankruptcy.
Declaring Bankruptcy: What Does It Really Mean?
What does it mean to declare bankruptcy? Put simply, bankruptcy is a way of eliminating your legal responsibility for debts. It is usually the last resort for consumers in financial distress, that have no way to consolidate credit card debt and allowing them to liquidate their debts. It requires filing a petition in court where a judge closely evaluates the total worth of your total liabilities and assets to see if you can’t pay your bills and decide whether to eliminate those debts so you are no longer responsible for them.
Bankruptcy laws were originally introduced to help people, who experience financial ruin, giving them a chance to start over. Whether it was bad luck or a bad decision, lawmakers believe that in capitalism, businesses and entrepreneurs who failed should get a second chance.
A study by the American Bankruptcy Institute found that 95.5% of the almost 500,000 bankruptcy cases were discharged, which means that the individuals were no longer legally required to pay their debt.
A tiny percentage of the cases were dismissed, in which case the judge felt that the individual had enough money to pay off their debt.
Those who filed under Chapter 13, also known as the ‘wage earners bankruptcy’ enjoyed almost 50% success almost 166,000 discharged and 164,000 were not entertained.
Who Can Declare Bankruptcy?
Businesses and entrepreneurs who declare bankruptcy no longer have the resources to pay their debts and don’t believe their financial circumstances changing shortly.
Perhaps more surprisingly, it is people, and not businesses, that often seek help. They usually take on a huge financial obligation such as mortgages, student loans, auto loans, or maybe even all three – and they don’t have the income to pay off the loans.
It is worth noting that while bankruptcy gives individuals a chance to start over, it comes at the cost of negatively impacting your credit. It can prevent foreclosure on a property, but it comes at a price.
When Is a Good Time to Declare Bankruptcy?
The good rule of thumb before filing for bankruptcy is to ask yourself an important question: what are my financial prospects in the next 5 years? If you think it will take you more than 5 years to pay off your loans, it’s time to file for bankruptcy.
The reason for this is simple: declaring bankruptcy was designed to give everyone a second chance after financially collapsing, not to punish them for their misfortune. If a combination of mortgage debt or medical bills have wrecked your finances, and you don’t see things changing any time soon, bankruptcy is usually the best answer, even if you don’t qualify for it.
What Are the Alternatives to Declaring Bankruptcy?
Declaring bankruptcy has far-reaching consequences, which is why it is better to evaluate the alternatives first. If you relate to one of the following situations, bankruptcy might not be the best course of action for you.
1. Can you find money to pay the debt another way?
While it isn’t fun to take on a second or third job to spend your evenings and weekends, even if you do this for a short period, the extra income would help you pay off your debt. Check out Bruins Capital.
2. Were you following a proper budget?
Many people underestimate the value of following a budget. As a consequence, they usually don’t know where their money is going, other than the bills. Without following a good budgeting program, it’s hard to see which areas of your life can be tweaked to free up the financial ‘clog’ in your life.
For the vast majority of us, the largest percentage of our income either goes to housing or auto loans. If you are renting a house, consider downsizing your house and moving to a smaller place. Or better yet, find a roommate to share in the cost of rent and other utilities. If your car uses too much gas, consider selling it and buying a smaller, more fuel-efficient car to save you the money that can be spent on paying off the debt.
3. Are your financial problems temporary?
Try to evaluate if your financial situation is temporary. For instance, if you’ve been laid off, will you qualify for unemployment benefits? Even better, what are your prospects for finding a new job? Quite possibly, declaring bankruptcy is not the best option.
4. Can you settle or consolidate your debts?
Many lenders are willing to adjust your payment plan and lower your interest rates if you tell them you’re filing bankruptcy. This is true for credit card companies that stand to lose the most. In many cases, you may just get a low-interest rate. Have you googled the term consolidate your debt and looked into those options? Maybe a personal loan is right for you. You have to look at all the options.
In the case of student loans, which can’t be cleared out in bankruptcy, you might qualify for hardship programs to lower your monthly payments by restructuring your repayment plan or tying your payment to your current income level.
Steps to File for Bankruptcy
Start by collecting all your financial documents, debt, income, assets, and expenses. This will give you a bird’s eye view of your financial situation and give the court a better understanding. The next step is to seek credit counseling at least 180 days ahead of filing for bankruptcy. You must go to an approved provider on the official website here.
Next, you have to file for the petition for bankruptcy. A bankruptcy lawyer may be useful at this pit, although they are not required for either Chapter 7 or Chapter 13 bankruptcy.
Once your petition is submitted, a court trustee will be assigned to you, who will set up meetings with your creditors. You have to be present in the meetings, but the credits are not obligated to be there.
Where Bankruptcy Does not Help
Bankruptcy does not eliminate all financial responsibilities, these include:
- federal student loans
- child support
- debts that arise after bankruptcy is filed
- loans obtained fraudulently