Thanks to bankruptcy laws, people and businesses who have experienced tragic financial collapse can start over with a clean slate. By filing for bankruptcy, these entities may be relieved of their past debts, so they can have the opportunity to reorganize their finances sans the harrowing pressure from creditors and debt collection agencies.
But as appealing as a clean financial slate can be, this is not to say that filing for bankruptcy is void of any downsides and consequences. Bankruptcy can have a significant impact on your credit reputation, so you better look at all sides properly before deciding to sign your debts away. And thus, begs the question: When to file for personal bankruptcy, and why should I do it?
Why Should You Declare Bankruptcy?
As you may have already known, the primary purpose of declaring bankruptcy is debt relief. There exists, however, an underlying and – perhaps – more pressing reason why people choose to file for bankruptcy despite being aware of the possible consequences: to get creditors off their backs.
Filing for bankruptcy activates what is legally referred to as the automatic stay. This prevents creditors from continuing any collection attempts, freeing the responsible party from the pressures that come with having unpaid debts. Declaring bankruptcy may also prevent eviction and disconnection of utilities for individuals.
When to File For Personal Bankruptcy – What You Need to Know
There are several types of bankruptcy, Chapter 7 and Chapter 13, being the most common for individuals. If you’re planning to file for bankruptcy in court, you need to understand what sets one apart from the other to make the right choice your specific financial situation.
Chapter 7 Bankruptcy
When you file for a Chapter 7 bankruptcy, all your non-exempt assets will be liquidated to pay off your creditors. After your non-exempt assets are sold and the money is divided among your creditors, all remaining unsecured debts under your name will be discharged.
When people with very-little-to-none non-exempt assets file for Chapter 7, the creditors only get what little they have to offer or none at all. This type is the best option if you don’t have a lot of non-exempt assets and your income isn’t substantial enough to cover your unsecured debts, which include medical and credit card bills.
Chapter 13 Bankruptcy
In contrast, Chapter 13 is a reorganization bankruptcy that adjusts the payment plan for your debts, so it’s easier for you to pay them off. This is for people whose incomes are large enough to cover an adjusted repayment structure of their obligations.
If you have plenty of exempt and non-exempt assets, Chapter 13 should be the right choice. While you have to pay for the entire amount that you owe — none of it getting discharged, unlike Chapter 7, you get to keep all of your assets while buying yourself more time to repay your creditors. Those who need debt relief to catch up on their mortgage or car payments usually go for Chapter 13.
Bankruptcy becomes a public record and should reflect on your credit report for the next ten years (in the case of Chapter 7) or seven years (in the case of Chapter 13). This may greatly affect your eligibility for a loan, as lenders impose tighter sanctions on individuals who underwent bankruptcy in the past.
The Right Time to File for Bankruptcy?
There is no such thing as the right time to file for bankruptcy; only you can decide when to file for personal bankruptcy. That being said, you should only bring the case to court after you have thoroughly assessed your financial situation. Filing for bankruptcy can be beneficial on your end when:
- You have already tried negotiating with your creditors but to no avail, because they insist on getting the full payment and won’t settle on a repayment plan.
- You have very few assets to cover a huge amount of liabilities, and the cost of servicing your debts far exceeds your income.
- You’re paying your debts with your credit card, which only buries you deeper in debt.
- It will take you longer than five years to settle the unpaid balance with your creditors.
Should You Hire A Bankruptcy Attorney?
Bankruptcy cases can be long and drawn out; the entire process taking anywhere between six months to a year or more. It is also a very demanding feat that requires a lot of time and effort for making the case and getting all the facts rights.
While the bankruptcy court allows self-representation, nobody should file for bankruptcy without the support and assistance of an experienced bankruptcy lawyer. Seasoned bankruptcy attorneys can expertly maneuver through the complicated world of bankruptcy law and make the entire process more manageable for you.
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. On his spare time, he enjoys cooking and doing camping trips with his family and friends.