To most, the idea of bankruptcy is nothing if not terrifying – but when it is all said and done, bankruptcy represents the chance to start over and get out from under an unfortunate and disastrous situation. Most people assume that bankruptcy is a sign of irresponsibility and an inability to work with money – that those who find themselves bankrupt are usually big spenders.
What bankruptcy really is, is a legal tool to help you seek out the chance to survive a financially crippling event – from major sickness to a lawsuit or any other set of unfortunate and uncontrollable circumstances capable of sending your entire lifelong plan spiraling out of control.
A bankruptcy may help absolve you of unpayable debt and give you a real shot at the future – but it is not free, and neither will it absolve you from all your financial obligations. Filing for bankruptcy can be an involved process depending on your circumstances and the kind of bankruptcy you need. Understanding this can go a long way towards helping you avoid further complications.
Bankruptcy is Not the End of the World
The first thing to realize when thinking about filing for bankruptcy is that it is not the end of the world – or even the end of your business. Bankruptcy comes in many forms, and several of them allow you to keep a business alive while you focus on paying off debts. Some of them even write off substantial portions of your debt, leaving you to worry only about the essentials, such as alimony/child support, taxes, student loan payments and such.
Bankruptcy takes the pressure of overwhelming debt off your shoulders, allowing you to compromise and come to a resolution to your financial woes, without completely invalidating the power of debt.
This is done through either liquidation or reorganization. Your eligibility towards either form of bankruptcy depends upon your property and your total income-to-debt ratio.
Chapter 7 & Chapter 13 are the most common types of bankruptcy declared by individuals and an example of the difference between liquidation and reorganization. Chapter 7 bankruptcy has the shortest time frame of them all, but can also be the most drastic form of bankruptcy. It involves the liquidation of any non-essential property and the resolution of unsecured debt. For example – if you have outstanding medical bills, credit card charges, personal loans and certain utility bills, declaring a Chapter 7 and being declared eligible may result in those debts disappearing.
To pay off what you still owe, however, your property may be seized (unless you can replace the seized property with an equivalent cash sum). Some property cannot be liquidated – such as your furniture and your clothes. Property below a certain dollar value may also be considered too hard to sell and will be left alone.
If you have secured debts – debts that are covered/secured by the property, such as a mortgage on your home – then the debtor must make a choice between either giving you an extended payment plan to help you pay off your debt, or repossessing the security deposit in the form of property. This may lead to a foreclosure on your home, for example.
Eligibility for a Chapter 7 bankruptcy requires financial proof that you do not make enough money to support a repayment plan, such as a Chapter 13 bankruptcy.
Unlike a Chapter 7, Chapter 13 involves the restructuring of your debt payment. This is a 3-to-5-year plan designed to help you pay off part of your debt while wiping out the rest. Exactly how much debt is left will be determined based on how much you owe, how much you make, and how much your creditors would have made if you had liquidated your possessions in a Chapter 7 bankruptcy.
There are limits to the amount of secured debt and unsecured debt in a Chapter 13 – these limits change constantly. If your debt exceeds them, you cannot file for a Chapter 13.
Chapter 11 & Chapter 12
Chapter 11 & Chapter 12 are usually reserved for businesses. A struggling business may file for a Chapter 11 to extend debt deadlines and help write off certain debts. There are cases when an individual may declare a Chapter 11, particularly when they are not eligible for a Chapter 7 or Chapter 13 bankruptcy, although this can be a lengthy process. This is typically the case for high income individuals with a large amount of secured and unsecured debt, exceeding the limits of a Chapter 13.
Chapter 12 bankruptcies are much like Chapter 13 bankruptcies, although they are reserved for individuals and businesses deriving over 80 percent of their debt from a family farm of some sort.
Avoiding Debt & Rebuilding Credit
We live in a world with debt markets, credit companies, and entire institutions designed to make real money off the idea and promise of money. Avoiding debt entirely would mean never taking out a loan, cutting up all credit cards and paying every cost upfront.
While it is possible, most people prefer not to live with these limitations – and neither should you. Sickness, financial catastrophe or a frivolous yet expensive lawsuit – these are events you cannot foresee or stop, yet life has its share of them and all we can do is move on.
Debt cannot be avoided. However, you can avoid piling on immense amounts of debt while simultaneously improving your credit rating by following a few simple pieces of advice:
- Pay in cash.
- Avoid impulse purchases.
- Keep a strict budget and create a spending limit.
- Keep only one credit card.
- Pay more than your minimum credit card bill.
- Always pay your bills, and always pay them on time.
- Save often, and create an emergency reserve. This will help you avoid pulling funds from your credit card in cases of emergency.
There are many people out there offering “unique” or “faster” ways of repairing your credit, yet most of these offers are scams. Rebuilding a credit rating is a process that simply takes its time, and requires you to be diligent, and careful.
Depending on what kind of bankruptcy you filed, the records and effect of your bankruptcy will be virtually expunged from your credit history within 7 to 10 years – although some lenders, such as banks, may still ask if you have ever run into bankruptcy, affecting your ability to take out a loan at affordable rates. After that, you will likely be able to purchase a credit card with normal premiums, and rent a home without drawing suspicions and fears of elevated risk.
All in all, getting out of a bankruptcy unscathed is impossible – but getting out in one piece is virtually guaranteed. Due to the volatility of bankruptcy rules – changing eligibility, and amended fine print – it is best to contact a bankruptcy lawyer and consult heavily before making the first step towards filing.