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Bankruptcy: Basic Facts and Avoidance Strategies
Personal bankruptcy is a very powerful option of last resort for dealing with an intractable debt problem. It offers the ability to shield a borrower from his or her creditors. Once he or she has declared bankruptcy, a borrower can obtain a court order releasing him or her from payment of most or all of the debt he or she has incurred. Bankruptcy can protect a borrower from utility shut offs, garnishments, repossessions, and many other debt collection actions. In America, the bankruptcy laws mean you will not go to prison for your debts. It is a bedrock personal protection of the law. That doesn't mean there aren't severe consequences to a bankruptcy declaration. In fact, it is an action that can and should be avoided if at all possible.
Why Not Bankruptcy?
Here is the most important reason: bankruptcies remain on one's credit report for up to 10 years. In the future, if you're looking to obtain further credit, take out a home mortgage, purchase insurance, or even upgrade your job status, bankruptcy is going to slam a lot of doors in your face. Your financial pathways will be severely limited and you will be forced into a situation where your lifestyle and personal comfort will be significantly less than what the could be without a bankruptcy declaration. You will also incur considerable and mounting legal fees. Should you declare bankruptcy, you will want to retain as competent and highly-skilled attorney as possible. These service don't come cheap, and remember -- you're in financial crisis in the first place. The attorney fees will eat into whatever assets you may have to protect and severely diminish your circumstances.
Where is Bankruptcy Powerless to Protect me?
Bankruptcy offers no protection from some student loan obligations, from alimony and child support, and, of course, no protection from tax obligations. Also: if your creditor holds an unpaid mortgage or lien on your home or any other properties you own, you will most likely lose them unless you are able to arrange a Chapter 13 plan of repayment.
The Different Types of Bankruptcy
There are two main types of personal bankruptcy: Chapter 13 and Chapter 7. The filing fees for each type of case amount to about $200 and will fall under the jurisdiction of the federal courts. Chapter 13 is more mild than chapter 7: In some cases you can retain ownership of property you might otherwise stand to turn over to your creditors. The court will establish a repayment schedule -- based on your current and future income for the next three to five years. You may be able to keep your property, home or automobile if you follow the schedule to the letter. Once the schedule is executed, you'll be granted a court order relieving you of further responsibility to your creditors. A more severe option of bankruptcy is Chapter 7 -- also known as "straight bankruptcy." This chapter will discharge you of your debts, at the expense of forfeiting most or all of your assets. In some cases you'll be permitted to keep certain items like tools you use on the job or certain of your home furnishings. Chapter 7 bankruptcy is available to you only once ever 6 years. If you come to crisis again in this period, you're looking at criminal legal trouble.
Dodging the Bankruptcy Bullet
If we haven't convinced you bankruptcy is a grave and severe financial decision, do some online research and find people who are willing to write or talk openly about their bankruptcies. To a man or woman, they'll tell you to avoid it if you can. If you have fallen behind on credit card or mortgage payments, speak with your lender immediately to see if you repayment term can be ameliorated or an alternate schedule can be worked out. Research debt and credit counseling and begin following best budgeting practices. Reach out to someone you trust and speak openly with them about your finances. You'll often find that by being honest and proactive, your financial problems will lend themselves to a solution more easily than you might think.
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