Who Should File for Bankruptcy?

There are many thousands of people in financial trouble today, to the point that many are considering bankruptcy.  The question is, when is it right for a debtor to take this step?  While the benefits of having more time to reorganize and pay off or write off some consumer debt are attractive, the many years of waiting until the stigma of bankruptcy cycles off their credit report can be troubling. 

Every debtor’s situations is different, and it can often require professional consultation with a bankruptcy attorney to determine when it is appropriate.  However, there are some guidelines to help.

Alternatives

For many people, the first step is to consider their alternatives.  Bankruptcy may be the first solution that comes to mind, but it is not the only one, and for many people, it may not be the right one.  In addition, new revisions in bankruptcy laws make it more difficult for consumers to file.  Every consumer should investigate several options first:

Credit counseling: This is now required before anyone can file bankruptcy, and it can help debtors reevaluate their spending from an unbiased perspective and discover that they can fix their problem this way

Negotiation with creditors:  This can produce lower interest, smaller payments over a longer period, lump-sum payments for a percentage of the debt, and more.  If a creditor knows someone is considering bankruptcy, they may be willing to settle for a smaller payoff

Debt settlement, modification, or negotiation companies:  This can provide a more powerful and experienced voice at the negotiating table, but there are many scams that can produce more harm than good

Grounds for Filing

There are some situations in which bankruptcy may be the only choice:

Other options are exhausted:  Those who have attempted every other means of relieving their debt situation without success may have no other alternative.

Liabilities exceed assets:  Those who find that their income and property cannot hope to pay their debt or even bring it up to date may find that bankruptcy is the best and only choice

Types of Bankruptcy

Once the decision to file for bankruptcy has been made, debtors must determine whether they can or should file chapter 7 or chapter 13, which are the most common options, or another type.

Chapter 7 – also known as liquidation, may require debtors to liquidate some of their property to pay off creditors unless that property is exempt under state or federal laws, then allows them to discharge or erase much of their consumer debt

Chapter 13 – also known as reorganization, retains debt but provides the debtor with more time, usually 3 to 5 years, to pay it off

Getting Help

There are many choices to be made by the consumer who is significantly in debt.  Those choices can be emotional and have far-reaching implications, since bankruptcy remains on a person’s credit score for up to 10 years.  Yet there are many legal protections that every debtor should take advantage of.  A bankruptcy attorney may add to the cost of filing bankruptcy, but they often provide enough guidance and legal protection to more than justify their fees.