Especially when it’s growing faster than you can pay it down.
And now everyone seems to be after your money at the same time.
Urgh, debt collectors knocking at your door is like a dagger through your heart each time.
Well, you’re not alone. In fact, some 17 million households in the US owe more than they own but less than 1% choose bankruptcy.
Because they don’t understand the advantages of bankruptcy, they fear it instead of using it to their benefit.
Bankruptcy is a financial tool to stop your current situation from getting worse almost instantly and protect you from losing everything. So keep reading for all the benefits of declaring bankruptcy.
Table of Contents
What are the Advantages of Filing Bankruptcy?
Filing for bankruptcy gives you an automatic stay which means your creditors (people you owe money) can’t continue action against you. It halts specific actions that a creditor might use to try and collect their debt. This is issued by the court and is designed to give you time to assess your asset and options in how to best move forward. This is usually seen as the biggest benefit of declaring bankruptcy as it immediately halts the downward spiral of debt and the risk of your possessions being repossessed.
If you are in business is also enables you the continue running your company to help improve your position and help you with the repayment of debts in the long run.
“The automatic stay provides a period of time in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition.” – US Courts
Keep House and Car
Bankruptcy is a useful financial tool to help you get out of crippling debt without losing everything you own. Used correctly, it allows you to create a payment plan or liquidate certain assets without losing the roof over your head. Bankruptcy law helps to protect essential housing and even a car from creditors. Usually, you will have to agree to a payment plan issued by the court to pay back at least a portion of your debt.
Without filing for bankruptcy you leave all your assets open to repossession by your creditors. This can be even more devastating if your house is repossessed leaving you with no home and still with a mortgage to pay off.
Another attractive advantage of bankruptcy is the partial or complete elimination of your debts. In some cases, debts like credit card balances, medical bills and personal loans are cleared altogether. Other debts are settled on average for 40-50 cents on the dollar.
As you can, see this is a major bonus with the burden of debt being lifted or completely removed. In fact, a 2019 study reveals that in the US around 530,000 bankruptcies are filed annually due to medical bills.
If you file for chapter 13 bankruptcy you will be given a court-mandated payment plan to help you pay back your debts over a 3 to 5 year period.
It gives you a clear path to pay back your debts which is monitored by the courts. This helps you to give clear structure in how and who you repay rather than being crushed under mountains of different debt. However, should you fall behind on payments then assets like your home and car could be liquidated to help repay your creditors.
Improve Credit Score
Another surprising benefit of filing bankruptcy is the improvement of your credit rating.
That’s right, it can actually improve your credit score. How can this be true?
Well, if you use chapter 13 bankruptcy you will work to a payment plan in order to repay your debts. If you stick to your payment plan then it actually counts positively toward your reputation to money lenders.
In fact, research from the Federal Reserve Bank of Philadelphia suggests that your credit score starts to improve in as little as 6-8 months after filing.
Mental Relief and Fresh Start
One thing you may not have considered is the mental health damage that high levels of debt can bring. The stress of debt takes a big toll on you and your family leading to issues including depression and anxiety. This can be damaging to your personal life and make it even harder to get out of debt.
A study in 2010 by the Royal College of Psychiatrists reports that in the UK, 50% of adults in problematic debt also live with mental health. This ranges from constant anxiety and low mood to medically diagnosed mental health disorders.
Declaring bankruptcy enables you to break free from this anguish and give you a fresh start to getting back on your feet. Imagine the relief if your debts were cleared or made simple to pay back without the threat of being left homeless.
Relearn Financial Habits – no credit
Once you’ve completed the bankruptcy process you’ll be able to rebuild your financial habits without the temptation of going into debt. For a few years, you won’t be able to get a credit card or overdraft to spend money you don’t have. It is time to start learning how to live within your means and only buy things you can afford.
This enforced change helps you to form new spending habits and adjust your appreciation of money so you can have a stronger financial future.
Courts may also compel you to take financial counselling to help improve your relationship with money in the future. Financial counselling enables you to learn how to handle your finances and how you ended up going bankrupt in the first place. It doesn’t just focus on things like budgeting and retirement goals but incorporates a fully holistic view of the way money shows up in your life. It looks at the way you think, feel and behave with money.
Final Thoughts: Benefits of Filing Bankruptcy
Bankruptcy exists for a reason, in the right circumstances, it can be much more beneficial than doing nothing.
The benefits of chapter 7 help you to liquidate certain assets without losing important possessions like your house and car. The benefits of chapter 13 benefits take a slightly different approach to create a payment plan to repay your creditors.
Overall, bankruptcy enables you to start moving forward with your life rather than continue in a downward spiral of uncontrollable debt. It stops your financial situation in its tracks, helps to repay creditors and improve your financial health long into the future.