Bankruptcy

Filing bankruptcy is one of the most difficult financial decisions a person can make.  The impact of such an action can have lasting consequences both financially and emotionally.   It is imperative to understand the risks and benefits before you undertake it.

Typically, the biggest affect will be on the person’s ability to obtain future credit, and the cost of that credit when a lender is willing to extend it.  A bankruptcy appears on credit reports and is reflected in FICO scores, sometimes for as long as 10 years. This means disqualification and/or higher interest rates for borrowers who have filed bankruptcy for many types of loans, including home mortgages, auto loans, and credit cards.

There are alternatives to bankruptcy. Loan consolidation is one.  This allows the borrower to pool all debt and pay one bill per month to the consolidated lender. Typically, consolidation does not lower the total debt obligations of the borrower.  However, it usually will save money by refinancing high interest debt at a lower rate. It also streamlines the payment process for borrowers as only one bill per month is paid, rather than making individual payments to various lenders.

Other options for borrowers can include trying to negotiate an outright payment to a lender in exchange for a reduced balance. A borrower can also try and reduce the interest rate paid to a lender by promising to make timely payments in the future.  If a reduction in the loan balance or the interest rate is not possible, simply coming up with a payment plan that is agreeable to both parties is a possibility.

If all else fails and the decision to file bankruptcy are made, the next decision is what type of petition to file. The two most common forms of bankruptcy are either a straight liquidation of all assets, known as a Chapter 7 or a reorganization of debt, commonly referred to as Chapter 13 for individuals and Chapter 11 for businesses.

Chapter 7 Bankruptcy – Making a Fresh Start
Both businesses and individuals can file for Chapter 7 bankruptcy. The process usually allows borrowers to “clean the slate” and start anew. In this form of bankruptcy, assets are sold and used to pay creditors. If the debt is secured by collateral, such as a car loan, then the vehicle may be repossessed and used to pay off the loan.  Some assets are classified as “exempt” by the State or Federal government, and can be kept by the borrower. It is also important to note that some debts cannot be eliminated, or what is commonly called “discharged”. Debts like student loans, tax liens and alimony are usually not dischargeable.

Chapter 13 Bankruptcy – Working Your Way Out of Debt
This form of bankruptcy is commonly referred to as “wage earner” bankruptcy as it requires borrowers to commit to a repayment plan, and thus only those with a stream of income usually qualify.

An individual who files for Chapter 13 bankruptcy must create a plan that specifies how debt will be repaid over a specific time frame, usually several years. There are numerous factors that affect the determination of how much of the total debt will need to be repaid, as well as whether any of the debts will be dischargeable. The debtor’s income, type of debt, and total amount owed are some of the factors considered.   This type of process may result in a borrower avoiding a foreclosure or repossession.

You can bet your bottom dollar that bankruptcy is a complicated undertaking. Consulting a bankruptcy attorney early in the process can result in a better outcome than waiting until the sheriff is at the door. Knowing your options ensures you are making the best choice for you and your family.