The word bankruptcy can send shivers down your spine. It’s a horrible word which can be loaded with feelings of failure and embarrassment.
But try not to worry and remove your emotions from the situation.
Bankruptcy is actually a useful financial and legal tool if used correctly.
The big question is should you file for bankruptcy or not?
Well, take the time to read further on bankruptcy vs doing nothing. Once you understand what it involves plus the pros and cons you’ll be in a better place to work out whether filing for bankruptcy is worth it.
And in fact, while bankruptcy might sound disastrous it’s not all bad, according to the Equifax scale the average credit score jumps nearly 100 points 6 to 8 months after finalizing a chapter 13 bankruptcy.
With a little positive news in mind, it’s time to ask yourself – is bankruptcy right for me?
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What happens if I file bankruptcy?
Bankruptcy is generally used as a last resort if you severely struggling financially. This doesn’t mean simply a lack of money, rather it is for people who are too deep in debt to be ever able to pay back what they owe.
Declaring bankruptcy is a last resort but can offer you a path to bring your finances in order and even a complete reset. While that may sound positive, you should be aware that there are a number of serious negative consequences. You should consider all the factors before trying to file for bankruptcy. For example, you may still lose personal possession and have credit issues long into future decades.
So what does bankruptcy actually do? Well, it can help give you the opportunity to reorganize and pay down your debts over time. Sometimes certain debts can be excused completely.
The big benefit of declaring bankruptcy is that it grants you something known as an automatic stay. This is a way of blocking your debt so that creditors can’t keep trying to collect what you owe. People you owe money to can’t take money from your bank by garnishing your wages or send debt collectors after any of your other assents.
Simply put, bankruptcy gives you time to agree with the court and creditors on what to do next while protecting your current position.
Bankruptcy does not wipe the slate clean, it helps to stop your downward spiral into deeper debt and work out a plan to move forward.
Downsides do exist for declaring bankruptcy too. It is a clear signal that you are no longer paying your debts which will further damage your credit rating. This means you’ll struggle to be approved for loans, credit, mortgages, apartment rental, phone contracts in the future. With bad credit, many financial products become hard to get including renting an apartment. This is because the world views you as someone who doesn’t pay their bills. That being said, if you do go bankrupt and work correctly to get out of your situation your credit rating can be rebuilt over time.
Chapter 7 vs Chapter 13 Bankrupty
In the US, you choose to file for 2 different types of bankruptcy known as Chapter 7 and Chapter 13. Let’s discuss the differences.
Chapter 7
Chapter 7 bankruptcy is known as liquidation bankruptcy. This is because it involves selling off the majority of your assets to pay as much of your debts as possible. Most things of value will need to be sold or ‘liquidated’ to pay your creditors. Fortunately, there are limits on what you have to sell including pension plans, essential housing and even a car can be immune from being liquidated.
Chapter 13
Chapter 13 might be more preferable if you don’t want to sell most of your assets and belongings. This style of bankruptcy helps you to restructure and organize your debts so that you pay them off over 3 to 5 years. Again, this will be mandated by the court and partial amounts of debt may be wiped off to satisfy everyone involved. Remember, your creditors would rather you pay a portion of debt than none at all.
The risk with chapter 13 is that if you fail to meet your payment plan, creditors will then start to claim your assets in order to pay your debts.
What happens if I don’t file for bankruptcy?
Ok so, bankruptcy is a useful financial tool to help you get out of serious debt but it comes with some drawbacks and is not a magic wand. So what happens if you do nothing and don’t file for bankruptcy?
Well, it is likely that you’ll continue on your downward debt cycle into more and more trouble. Plus, you won’t have the courts to help mediate between you and your creditors. Of course, each case is individual but let’s look at some common examples of what happens when you don’t file for bankruptcy:
- If you have credit card debts they continue to increase at an alarming rate. The debt starts to compound meaning the outstanding balance grows exponentially and minimum payment get larger at a faster rate. You’ll feel like it is impossible to ever reduce the total amount you owe. It’s like you’ve dug a hole and now the bank is digging deeper with a JCB you can’t switch off!
- You might not know that creditors (people you owe money) can begin taking money directly from your paycheck – its called garnish. You’ll be powerless to stop creditors taking a quarter of your pay. It can get worse too as your bank account can even be frozen to stop you accessing your money. Nightmare!
- Your assets might be repossessed meaning debt collectors take your possensions to pay the debt. Unfortunately, this is very common with people losing their cars and homes plus you could still be left to pay your mortgage for a house you don’t even own any more.
- You credit score will get crushed. As soon as you start defaulting on your debts and bills it will kill your credit score. You’ll struggle to get access to financial products, phone contracts or even rent an apartment. People won’t trust you ability to pay bills – and probably for good reason. A landlord won’t rent to your if he doesn’t believe you can pay your rent.
- Other consequences of doing nothing instead of bankruptcy include jail time, passport denial, loss of unemployment benefits, driving licence suspension and loss of social security.
Is bankruptcy right for me?
Deciding whether bankruptcy is right for you is a tough choice and you should get legal advice as soon as possible. It is no magic pill and is not just an easy way to get rid of debt you don’t want, there are serious future implications. That being said, if you have serious debt that you simply can’t pay down quickly enough to reduce the overall amount then it could be a good option. If you get too deep into debt then you could lose your home while still nosediving deeper into debt.
How can you file for bankruptcy with no money?
You’re probably not pleased with the idea of having to pay out money to go bankrupt. I mean how can you afford to pay for bankruptcy when you can’t even pay your electric bill?
Filing for bankruptcy doesn’t have to be expensive and in some situations, the court will even waive your filing fee. That’s a big help but you might still need an attorney to file which you might need to budget for. Alternatively, the law allows individuals to file for themselves. You’ll have to fill in the forms yourself though or use helpful tools like Upsolve.
Should I declare bankruptcy or not?
Bankruptcy is a tool designed for people you can’t hope to repay their debts. For example, if you a falling behind on loan or mortgage repayment, being chased by people you owe money too or debt collectors are knocking at your door then bankruptcy might be for you.
Is it better to file for bankruptcy off pay off debt?
Generally speaking, when you file for bankruptcy parts of your debts are wiped off meaning you may only have to pay back 40%-50% of what you owe. Quite often this is between 40 to 50 cents on the dollar. If you can’t pay what you owe then it could be better to skip the debt by filing for chapter 7 bankruptcy. This clears medical bills, personal loans and credit card balances in a matter of months.
What is the downside of filing for bankruptcy?
The downside of filing for bankruptcy is the ability to gain approval for financial products such as personal loans and mortgages in the future. Adding to this, other people might deem you as untrustworthy such as landlords or phone companies as they won’t believe you will be able to pay what you owe. Bankruptcy can also lead to the liquidation or ‘sale’ of your belongings and assets to pay your debt.
Does bankruptcy clear all debt?
No bankruptcy does not completely clear your debt. Some types of debt can’t be wiped out and in many circumstances, you will still have to pay back at least a portion of your debt either by selling your assets or using a payment plan created by the court. You might be able to eliminate other common types of debts like credit cards, medical bills and personal loans.
Can I keep my car if I go bankrupt?
When filing for bankruptcy some local laws enable you to keep your car and essential housing as long as you keep up with your debt repayment plan. If you fall behind on your court-ordered payment plan then creditors may be able to go after your car.
Final Thoughts: Bankruptcy vs Doing Nothing
While bankruptcy sounds scary and is often thought of as the last resort, it is also a handy financial tool to get yourself out of an unwinnable situation.
If your debts are mountain quicker than you can pay them down and you see no way out of your current situation then it might be wise to consider filing bankruptcy.
It is not a decision you should take lightly and please seek professional legal advice before making any choices. You’d be surprised at how much a professional can help you even if it seems like you can’t afford it!
There’s no doubting there is a bumpy road ahead and there’s no magic wand to plain sailing with your future finances. But one thing is true in life, continue to ignorantly neglect the situation and I can guarantee you it continues to get worse.