When most people think of bankruptcy, financial struggle comes to mind. Some grapple with the idea of their credit score plummeting, while others fret over the prospect of losing their home.
The social stigma associated with bankruptcy dates back to 16th-century Europe, when those with major monetary problems were publicly humiliated or thrown in debtors' prison.
But a lot has changed in the past five centuries. While bankruptcy is far from ideal, in some cases it's not entirely a bad idea. In fact, any consumer law attorney will tell you that sometimes bankruptcy really is the best decision one can make.
Signs It Might Be Time To File For Bankruptcy
For consumers who are anxious over their monetary situation — perhaps to the point where they're struggling to sleep at night — bankruptcy might be more of a relief than a stressor. Those who are falling deeper and deeper into debt, and who fear their finances are nowhere near stabilizing, ought to meet with a bankruptcy attorney to determine their next move.
Consumers who meet the following criteria should consider filing for bankruptcy:
- Behind on their mortgage or vehicle and unable to catch up
- Unable to cover their basic expenses (i.e., groceries, transportation, rent or mortgage, and utilities) without using credit
- Unable to make more than the minimum payments on their debt
- Seeking cash advances, payday or title loans, or other high-interest loans to secure their finances in the short-term
- Coping with a major loss of income or a spike in expenses
- Coping with tax debt they cannot pay off within 12 months
It should go without saying that debtors who have received a notice that their home will be foreclosed, or that their car will be repossessed, ought to meet with a bankruptcy attorney as soon as possible to discuss their options.
Bankruptcy: An Overview
In a nutshell, bankruptcy allows consumers to free themselves from debt and start over financially. Those who file must be approved by a federal bankruptcy court. Then, upon receipt of bankruptcy status, their debts will be forgiven and collection agencies will no longer have legal grounds to pursue them. The purpose of bankruptcy is to give debtors a fresh start.
Of course, the concept is a bit more complex than that synopsis. So before we delve into bankruptcy and when it might be a good option, let's review the differences between Chapter 7 and Chapter 13.
- Chapter 7 Bankruptcy
Also known as asset liquidation bankruptcy, Chapter 7 involves a judge selling the debtor's nonexempt assets to pay back at least some of their debts. This is ideal for those with high debts and limited earnings. (Consumers should note that they cannot file for Chapter 7 bankruptcy if they earn more than their state's median income.) Those facing credit card debt or substantial medical bills often file under Chapter 7.
- Chapter 13 Bankruptcy
While Chapter 7 proceedings take three to six months, Chapter 13 proceedings last three to five years. This form of bankruptcy is available to debtors with a steady income who can meet the terms of their court-approved repayment plan. Debtors do not have to liquidate their assets if they file under Chapter 13, but they must pay off their debts with any remaining income after covering their basic needs. This type of bankruptcy is a sound decision for debtors who want to avoid foreclosure on their home, or who need a bit of time and structure to pay off their debts.
So In What Scenarios Does Bankruptcy Make Sense?
There are a number of situations that indicate that it might be time to file for bankruptcy.
- Extenuating Circumstances Have Made It Impossible For You To Cover Your Expenses.
Frequently, consumers file for bankruptcy not because they have made poor decisions, but because circumstances outside of their control have made it difficult for them to cover their monthly expenses. If you are dealing with a job loss or medical bills following an emergency, and you do not have sufficient savings or income, bankruptcy protection might be an appealing decision.
- Your Liabilities Are Greater Than Your Assets.
Bankruptcy is often a solid option when consumers' liabilities are worth far more than their assets. Without enough liquidity, paying off debt will be an uphill battle. Accordingly, if the debtor's income won't even allow them to meet the minimum requirements of what they owe, then bankruptcy will provide a much-needed fresh start.
- Negotiations With Creditors Have Failed.
Before filing for bankruptcy, the debtor must try to negotiate with their creditors. This can be very effective. To go about negotiating, the consumer should offer concrete evidence of their financial struggles — copies of paycheck stubs, bank statements, and unanticipated bills — and the creditor will consider reducing their outstanding debt.
However, if the creditors refuse to negotiate, the debtor will likely have no other option than to file for bankruptcy protection. And as daunting as it can be, the process will offer the consumer a certain degree of relief.
For more information on When Bankruptcy Is The Best Decision, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (515) 451-1260 today.
Information contained herein does not constitute legal advice and is only intended as general information. Every case is unique and one should contact a specific attorney regarding their particular situation.
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