When to Consider Bankruptcy
When to Consider Bankruptcy
Being hounded by creditors is not a pleasant experience. For some, the prospect of debt relief, even if it means bankruptcy, may seem like a comfort. For others, the prospect of leaving behind a trail of bad debts in unpalatable. In any case though, bankruptcy should be chosen only after you have considered all other debt relief options.
Whether or not bankruptcy is your best debt relief option depends on the facts and circumstances of your situation. While there are a few general types of bankruptcy, no two bankruptcies are exactly the same. You should consult the advice of debt relief counselors, and if bankruptcy is necessary, retain a bankruptcy attorney before proceeding.
A central focus of the bankruptcy process is to determine how much of your debts you can pay. Three important factors determine your ability to pay: your income, your assets, and the amount of your debt. If you have a reasonable amount of income or assets relative to the amount of your debt, you are less likely to relived of the majority of your debt but many of your assets (such as your house) may be protected. expect a significant amount of these to go toward paying off your bad debts. In short, expect bankruptcy to be a method of protecting your income or assets.
Another important factor is the type of debt you have. Certain types of debt cannot be eliminated under bankruptcy proceedings. These include federal student loans, tax debt, and spouse or child support. If any of these are the source of your financial distress, then bankruptcy will not provide you any debt relief.
There are two basic situations in which bankruptcy may be your only resort:
- If your debts far outweigh your assets and income potential
- If you could pay off your debts if given more time, but your creditors won't work with you
Bankruptcy Options and Consequences
The two types of bankruptcy an individual is most likely to consider are Chapter 7 and Chapter 13. While Chapter 7 represents more of a fresh start, recent law changes have made it more difficult to qualify for this form of bankruptcy. Chapter 13 is a longer process involving credit counseling, and is designed to make you work through as much of your debt as possible.
In any case, bankruptcy has consequences. It will be listed on your credit reports for ten years. This could restrict your access to credit in the future, or else cause you to pay higher interest rates for credit. It could also bar you from certain jobs which require a security clearance or bonding.
Another consequence is the expense. Because of liability concerns under recent bankruptcy laws, many bankruptcy attorneys now charge more for the process. Obviously, in a situation where you are seeking debt relief, this is a step in the wrong direction.
Debt Relief Alternatives
Because bankruptcy has consequences, be sure you have exhausted all other debt relief options before resorting to it. Consider the three main elements of the bankruptcy process:
- Liquidating assets to pay debt
- Earmarking future income to pay debt
- Working with creditors to reduce or restructure debt
Work with a debt relief counselor to see if you can use these methods yourself to resolve your debt problems. It's not a cost-free solution, but in the long run it may be cheaper and less restrictive than bankruptcy.Sources: