Before you resort to filing for bankruptcy, consider the alternatives. Creditors might be willing to settle their claim for a smaller cash payment, or they might be willing to stretch out the loan and reduce the size of the payments. This would allow you to pay off the debt by making smaller payments over a longer period of time. The creditor would eventually receive the full economic benefit of its bargain.
Occasionally, you may “buy time” by consolidating your debts; that is, by taking out a big loan to pay off all the smaller amounts of debts that you owe. The primary danger of this approach is that it is very easy to go out and use your credit cards to borrow even more.
In that case, you end up with an even larger total debt and no more income to meet the monthly payments. Indeed, if you have taken out a second mortgage on your home to obtain the consolidation loan, you might lose your home as well.
When there really is no other way out, you’ll need to file for a Chapter 7 personal bankruptcy. Try looking at it in a positive light, however.
Advantages to Filing for Bankruptcy
By far the most important advantage is that debtors may obtain a fresh financial start. Consumers who are eligible for Chapter 7 may be forgiven (discharged from) most unsecured debts.
A secured debt is one which the creditor is entitled to collect by seizing and selling certain assets of the debtor if payments are missed, such as a home mortgage or car loan. With those two major exceptions, most consumer debts are unsecured. You may be able to keep (that is, exempt) many of your assets, although state laws vary widely in defining which assets you may keep.
Collection efforts must stop as soon as you file for bankruptcy under Chapter 7 or Chapter 13. As soon as your petition is filed, there is by law an automatic stay, which prohibits most collection activity.
If a creditor continues to try to collect the debt, the creditor may be cited for contempt of court or ordered to pay damages. The stay applies even to the loan that you may have obtained to buy your car.
If you continue to make payments, it is unlikely that your creditor will do anything. However, if you miss payments your creditor will probably petition to have the stay lifted in order either to repossess the car or to renegotiate the loan.
You cannot be fired from your job solely because you filed for bankruptcy.
Disadvantages of Filing for Bankruptcy
Of course, there are disadvantages to filing for bankruptcy. Since your bankruptcy filing will remain on your credit record for up to ten years, it may affect your future finances. A bankruptcy is a troublesome item in your credit record, but often debtors who file already have a troublesome history.
In one respect, bankruptcy may improve your credit records. Because Chapter 7 provides for a discharge of debts no more than once every eight years, lenders know that a credit applicant who has just emerged from Chapter 7 cannot soon repeat the process.
Research in this area has produced mixed results. A study by the Credit Research Center at Purdue University found that about one-third of consumers who filed for bankruptcy had obtained lines of credit within three years of filing; one-half had obtained them within five years.
However, the new credit itself may reflect the record of bankruptcy. For example, if you might have been eligible for a bank card with a 14 percent rate before bankruptcy, the best card that you can get after bankruptcy might carry a rate of 20 percent-or you might have to rely on a card secured by a deposit that you make with the credit card issuer.
Filing for bankruptcy should always be the last resort to save your financial situation. If you have not other option, filing for a bankruptcy is not the end of the world. Next we take a look at how to file for bankruptcy.