Should Bankruptcy Only Be Considered as a Last Resort?

When you think about someone filing for bankruptcy, what do you imagine? Do you see someone who’s completely destitute and all out of options? You’re not alone. This is the public perception we’ve created for bankruptcy, in part due to our limited understanding of this nuanced legal option.

Most people believe that bankruptcy should only be considered as an absolute last resort, after all other options are attempted. But is this truly the case?

What Is Bankruptcy?

First, we should define exactly what bankruptcy is. Bankruptcy is a legal process designed to help people manage their debts and get through tough situations. It exists not to punish people, but to give them a clear path forward after making financial mistakes or suffering significant hardships. By this definition alone, we can see that bankruptcy is there to be used by people for their benefit.

It’s also important to realize that there are many different types of bankruptcy you can file. There are different types of bankruptcy for individuals and businesses, and different “chapters” of the Bankruptcy Code that offer different strengths and weaknesses.

How Does Bankruptcy Work?

The first step of the process is to talk to a bankruptcy lawyer. Your bankruptcy lawyer will be able to educate you on the nature of bankruptcy, explain the different types of bankruptcy that are available to you, and discuss your options moving forward. You may not be a good candidate, but if you are, your lawyer will be able to give you all the advice and direction you need throughout the next stages of the process.

The exact nature of the bankruptcy process you follow will vary depending on what type of bankruptcy you select. With some types of bankruptcy, most or all of your debts will be discharged. With others, you may be required to pay back a portion of debt to the creditors, restructure your debts, and come up with a repayment plan that works for you.

Chapter 7 Bankruptcy

A person may file for chapter 7 bankruptcy protection if they meet all of the criteria. The process is very brief. The case is completed about four months after the filing. Chapter 7 eliminates all of the debtor’s unsecured debt, such as credit card debt and personal loans. Additional debt may be eliminated, as well. If a person wants to keep their car and/or house, the debtor must continue to make the payments on the vehicle financing and mortgage.

No bankruptcy payments must be paid for a chapter 7 case.

Chapter 13 Bankruptcy

Typically, a person would file a chapter 13 case to save their house from foreclosure and a vehicle from repossession. Someone may also file for chapter 13 protection because they do not meet the chapter 7 criteria that allows the elimination of certain debt. In lieu of filing a chapter 7, an individual could file a chapter 13 case and eliminate a portion of their unsecured debt.

A chapter 13 case requires a monthly trustee payment, which is disbursed to various creditors by the trustee. A debtor that is saving a house from foreclosure must include funds in their trustee payment, representing the mortgage payment arrears. The trustee payment funds should also include automobile finance arrears, if the debtor is in arrears with their vehicle finance payments.

Questions and Concerns About Filing for Bankruptcy

A person must first consider the benefits and drawbacks of filing for bankruptcy protection.  A person that must save their house from a sheriff’s sale may wish to file for chapter 13 protection, irrespective of the drawbacks. Comparatively, a debtor may wish to save their car from repossession, based on their need to keep their automobile that is necessary for work transportation. Also, a person may not consider the burdens of a bankruptcy filing if they are drowning in debt.

The Drawbacks of Bankruptcy

There are some major drawbacks of bankruptcy, which is why so many people see it as a last resort.

  •       Credit impact. Filing for any type of bankruptcy will likely negatively impact your credit. This is arguably the most important drawback of bankruptcy. Also, depending on which type of bankruptcy you file, bankruptcy may remain on your credit report for seven to ten years. However, after the completion of the bankruptcy case, a debtor should be able to substantially improve their credit score within one to two years.
  •       Loss of credit cards. One must forfeit all credit cards and close all accounts. Without this line of financial backup, it may be harder for you to get by on a day-to-day basis.
  •       Feelings of inadequacy. People may avoid bankruptcy because they don’t want to feel inadequate. Though not always deserved, bankruptcy filers may need to cope with shame and feelings of low self-esteem.

The Benefits of Bankruptcy

  •       Debt discharge. All the debts you’ve been struggling with, or at least most of them, could disappear.
  •       Restructured debts and saving property. In addition to saving one’s house from foreclosure and an automobile from repossession, bankruptcy may allow a debtor to eliminate liens and change how payments are made to creditors. Also, if you file for Chapter 13 bankruptcy, you may be able to solve numerous financial issues at the same time.
  •       Stop creditors collection efforts. Upon the filing of any bankruptcy petition, the creditors must stop all lawsuits and actions to collect money or property. Additionally, upon the filing, creditors must release wage garnishments and bank account levies.
  •       A path forward. No matter what, bankruptcy gives you a financial path forward. You’ll no longer feel trapped or stuck in one position and you’ll have more options for your future.

Is Bankruptcy Truly a Last Resort?

Bankruptcy may or may not be considered as a last resort, based on each person’s circumstances. Assuming an individual is not drowning in debt, he should weigh the benefits and burdens of filing. One should also consider their quality of life.

For example, if an individual is eligible to eliminate all of their debt, should she continue to make the minimum payments for another 20 years and take on a second job? Or, in the alternative, should she file for bankruptcy protection, eliminate her debt, and deal with the negative consequences of the filing?

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