Bankruptcy is a complex topic that truly requires more space than we can dedicate to this page.
There are a number of reasons why bankruptcy should be considered the final option.
But first, what exactly is bankruptcy?
For consumers, there is essentially two kinds of bankruptcy.
Chapter 7, which is much more difficult to qualify for since the law changed in 2005, is liquidation. With this form of bankruptcy, certain properties are considered exempt, meaning untouchable by the courts, and the remainder is liquidated and distributed to the creditors under the supervision of the court. That is the entire payout to the creditors and your unsecured debt is forgiven. Since most people that enter Chapter 7 bankruptcy have only exempt property, creditors typically get nothing.
Chapter 7 bankruptcy does nothing when it comes to secured debt. If you are current with your payments and you are able to continue those payments, you can reaffirm the debt and hold onto the property. If you wish to surrender the property into the bankruptcy, the property will be sold and the proceeds will be given to the creditor. Any remaining debt is then forgiven.
Under Chapter 13 bankruptcy, you are required to pay back a portion of the debt over a five year period. Under the new bankruptcy laws, the court will apply a “means test” to determine your eligibility for Chapter 7 bankruptcy verses Chapter 13 bankruptcy. If your income is above the median for your state, and if you can afford to pay back at least $100 per month towards your debts, you will be denied Chapter 7 status and required to file under Chapter 13 instead.
There are a lot of things bad about bankruptcy.
- It’s very expensive
- It shatters your credit for 10 years and can even hinder employment opportunities or rental opportunities beyond that
- It becomes public record
- With Chapter 13 bankruptcy you can end up paying back a very high percentage of your debt
- Chapter 13 bankruptcy has a very low success rate
- Bankruptcy still carries a stigma
That being said, Chapter 7 bankruptcy can be a tremendous relief for people under the right set of circumstances. It is the quickest way to becoming debt free.
Declaring bankruptcy forces all creditors to cease and desist from attempting to collect the debts owed them, it stops wage garnishment, reverses judgments, and in the case of Chapter 7 bankruptcy, wiped out the debt.
Chapter 13 bankruptcy, on the other hand, rarely makes any sense. It should really only be seriously considered if it is used to save a home from foreclosure.
Even then, the long-term success rate is extremely low because the payments required by the court for the home mortgage will be the regular payment plus some additional money to recover the arrears. In most cases, this payment is unrealistic.
Bankruptcy should be considered a last resort under most circumstances. That is its intent. Often, there are better options available. In most cases, debt settlement is the logical alternative to filing bankruptcy.