Cliché, but true; everybody deserves a second chance — be it in life, relationships, or in handling their finances. For those who find themselves in a financial bind they can’t get out of, filing for bankruptcy is often the last resort that saves them from sinking deeper in debt.
There are various reasons why people’s finances collapse. Some of the most common are unemployment, marital problems, steep medical bills, and severely overextended credit. Plenty of cases, however, can be attributed to bad financial decisions and plain bad luck.
The U.S. bankruptcy laws are there to give financially-strapped individuals and businesses a chance to start over. Hundreds of thousands of people file for bankruptcy in the United States every year. Those who are getting overwhelmed by debt should consult an experienced bankruptcy lawyer to determine whether or not filing for bankruptcy is an ideal option for them.
Chapter 7 vs Chapter 13 Bankruptcy
During a bankruptcy proceeding, a judge and court trustee examine the assets and liabilities of the person or business seeking for debt relief. While anybody who files for bankruptcy has generally the same goal, the court does not simply award bankruptcy protection to anyone.
If you think that filing for bankruptcy is your only way out of financial distress, you need to come to court prepared. Most personal bankruptcy cases are filed under Chapter 7 bankruptcy or Chapter 13 bankruptcy. Both programs offer possible debt relief, but on different terms.
With that being said, one of the first things you need to know and learn about is what bankruptcy program to qualify for.
What is Chapter 7 Bankruptcy?
In a Chapter 7 bankruptcy, all your non-exempt assets such as a home that has above the bankruptcy homestead exemption liquidated or sold off by a trustee, and the proceeds of the sale are used to pay off as much of your debts as possible. After the court divides the money among your creditors – such as banks, lending institutions, or credit card companies, what remains of your debts will be discharged.
Majority of those who declare bankruptcy file under Chapter 7 because it offers almost-immediate debt relief. Remember, though, that this program will only relieve you of unsecured debts – credit cards, utility bills, medical bills, or any financial obligations that do not involve a guarantor or collateral.
Who is it for?
Having the remainder of your debts discharged may sound very appealing, but Chapter 7 isn’t always the right choice for everyone. First of all, those who are earning more than their state’s limit may not qualify based on means testing for this bankruptcy program. That is why a common question is what is the income limit for filing Chapter 7.
Also, since almost all of your assets are going to be liquidated to repay creditors, Chapter 7 isn’t the best idea if you have a home or properties that you want to hold on to.
For those with little properties left or debts that amount to so much more than they own, filing under Chapter 7 could very well work in your favor.
What is Chapter 13 Bankruptcy?
If you have assets you want to keep, Chapter 13 could be the right bankruptcy program for you.
Unlike Chapter 7 that liquidates almost everything you own, a Chapter 13 will only reorganize your debts and give you more time to settle them – usually between three to five years. The court will total all your secured and unsecured debts, and then set a more affordable repayment plan that is within your monthly income.
Chapter 13 also offers a grace period for people who earn a consistent and predictable annual income. Any debts that remain at the end of the grace period are typically discharged.
Who is it for?
This bankruptcy program is the better option if your monthly income is enough to cover an adjusted repayment schedule of your debts, especially if you have assets you just can’t let go of. It’s the more reasonable choice for people who want to catch up on their missed mortgage or car payments and other financial obligations, but without having to give up any of their properties.
If you failed to get a Chapter 7 discharge because of your relatively high income, you may have a better chance at qualifying for debt relief with Chapter 13.
Should I File for Bankruptcy?
Everybody goes through some form of financial trouble at certain points in their lives. In most of these instances, you will find a way to realign your finances and free yourself of debts. However, there are times when you’re already in too deep, that the only way out – and get creditors off your back – is to declare bankruptcy.
While there’s no way to tell for sure when it’s time to file for bankruptcy, there are ways to effectively assess your situation and tell whether or not you’re already in the financial danger zone.
Start by asking yourself these questions.
- Have I tried negotiating with my creditors but to no avail?
- Do I owe more than I own?
- Am I paying my debts with a credit card?
- Am I only making minimum payments on my credit card?
- Are bill collectors calling me?
- Is my financial situation making me feel scared or out of control?
If you’ve answered YES to at least three of these questions, it’s time to review and evaluate your financial position. Before anything else, try to get a better picture of where you currently stand financially.
An easy way to do this by making an inventory of all your liquid assets. If the total of your assets is less than the number of your total debts, it might be time to consider bankruptcy.
Get Real Time Bankruptcy Perspectives from Reddit and BK Forum
Thankfully, we live in 2021 where there are ample resources to get others’ perspectives on declaring bankruptcy. You can find helpful resources about declaring bankruptcy on reddit. People share their stories and experience. Another example is the free bk forum is an active community with many people asking questions about bankruptcy and sharing stories.
Seeking Professional Help
A lot of people are ashamed to say that they’ve gone bankrupt. But while it’s often hard to admit that you need to go through extreme measures to get out of debt, keep in mind that bankruptcy codes are there not to punish but to help you and give you another opportunity to set your finances straight. You could be doing yourself a disservice by not doing so when the situation has been calling for it.
Still, filing for bankruptcy is a huge decision that could impact your life for the next few years. Talking to a reputable bankruptcy attorney will educate you on the process and help you weigh all your options before taking the plunge.
About the Author
Sam Mazella is the Marketing Director of The Peterson Law Firm, the go-to practice in Arizona when facing divorce, child custody, child support, and financial crisis. In his spare time, he enjoys cooking and camping trips with his family and friends.
