Late payment notices; calls from debt collectors; bills piling up. If you’re struggling with an immense amount of debt that you just can’t seem to crawl your way out of, you may have considered declaring bankruptcy to feel some sense of relief.
There’s never one specific reason that makes a person decide to declare bankruptcy – it’s usually due to a combination of debts, job loss, divocre, and unexpected financial obligations (like medical bills), that make it difficult to pay off and get ahead.
However, declaring bankruptcy has long-term financial consequences that take upwards of a decade to recover from, and should really only be considered as a last-resort option. So when does it make sense to declare bankruptcy, and when should you resort to other options? Read on to learn the pros and cons of each to help decide on the best financial move for you.
What Does “Declaring Bankruptcy” Really Mean?
For individuals with an extreme amount of debt, declaring bankruptcy is a way for them to get a fresh financial start.
When an individual declares bankruptcy, they’re entering an official legal proceeding due to being unable to repay their outstanding debts. In doing so, all of the individual’s assets are measured and evaluated, and are then used to repay a portion of the outstanding debt.
However, this is not a process to take lightly, since all bankruptcy hearings in the United States are handled by the federal court, meaning all final decisions are made by a bankruptcy judge, including whether or not an individual is even eligible to file.
What Makes a Person Eligible to Declare Bankruptcy?
There are a few eligibility requirements an individual must meet to be able to file either Chapter 7 bankruptcy (which wipes out debts like credit card bills) or Chapter 13 bankruptcy (which puts an individual on a more manageable 3 – 5 year repayment period for debts).
Aside from not having filed for bankruptcy in the past 6 – 10 years, your average monthly income in the past six months must be lower than the median income for the same-sized household in your state. This helps the court determine whether your disposable income is high enough to make partial payments to unsecured creditors. So, if you had originally filed for Chapter 7 bankruptcy but the courts determined that you are eligible to make partial payments, they may have you refile for Chapter 13 bankruptcy and put you on a repayment plan instead of wiping your debts clean.
Additionally, filers must complete credit counseling that meets the court requirements at least 180 days before filing to move forward with the process.
When Declaring Bankruptcy May Be a Good Choice…
As debt.org advises, “think hard about whether you could realistically pay off your debts in less than five years.” If the answer is no, declaring bankruptcy may be the lifeline you need when banks, lenders, and even friends or family aren’t able to help.
If you’re behind on bills and don’t see a way out, declaring bankruptcy is a safe, legal way to get your debts wiped clean and receive a fresh start to get back on your feet.
…and When to Consider Other Options
As mentioned before, declaring bankruptcy has long term impacts on your financial health and credit. So while your debts may be wiped clean and creditors won’t be able to contact you, you’ll also have difficulty applying for any new loan (including a mortgage, car loan, or personal loan) for up to a decade as the bankruptcy will be flagged and attached to your credit report.
It’s also worth noting that filing for bankruptcy comes with a few costs, including a bankruptcy lawyer and/or attorney fees, along with filing fees, which averages out to be anywhere from $1,500 – $4,000.
If you know you won’t be able to fund the court fees, or will need to leverage the help of a bank in the next 10 years for any kind of funding or loan, you may want to consider alternatives, such as a debt management program or debt consolidation loan.
Like any financial move, considering bankruptcy is a personal decision that depends entirely on your financial situation and future goals, so it’s recommended to consult with a trusted financial advisor to weigh the options and make the best decision available to you.
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