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When paying debt becomes too difficult to handle, most people resort to filing for bankruptcy. However, certain factors come into play that most people are ignorant of before carrying out this process.
Bankruptcy may help clear your debt or at least reduce them. While filing for insolvency may provide an escape route to solving debt cases, you need to understand the consequences of taking this action.
In this article, we will delve deeper into the truth about bankruptcy and explain the process.
What is Bankruptcy
Bankruptcy refers to a legal process that officially recognises your inability to settle your outstanding debts. This process relieves you of your debts if you are unable to settle them, provides relief options and gives you a new beginning. During this process, the judge as well as other legal bodies will examine your entire assets and liabilities, business corporations and ownerships.
The court carries out this assessment to evaluate your outstanding debts alongside your finances. Filing for Bankruptcy is a personal choice and depends on your financial stability to cover the debts you owe. The bankruptcy process is often long and strenuous as you’ll need to provide much essential information about your finances.
The process usually starts with the signing of a bankruptcy petition by the debtor or on a creditor’s behalf. You will get this form as soon as you file with a clerk at a bankruptcy court. Several official signings in this stage will require your assent.
This petition mostly covers full details of the debtor’s assets and properties which are calculated as a possible means of paying a portion of your debt. As a requirement, you must disclose all information about your financial status and documents on the petition forms.
During the legal proceedings, the court will evaluate your assets and compare them to outstanding debts. This process will influence the court’s decision on their verdict. The court may decide to dismiss the case if it feels the evaluation of your finances is sufficient to pay the debts.
The court also could dismiss the case if it believes the person or business has enough assets to pay their bills. However, if the court does believe you are financially incapable to settle your debt, it will rule in your favour. This means that the judge will declare you legally free of all your pending debts.
Bankruptcy laws were created to provide an opportunity for people in irresolvable debts to start afresh when there isn’t any other financial option.
Types of Bankruptcy
The court handles cases of bankruptcy and the federal law recognises 6 types.
Chapter 7 and Chapter 13 are the two most common types of bankruptcy. These bankruptcy codes are commonly associated with businesses which makes them most people’s file and perfect for those in debt cases.
Chapter 7 Bankruptcy
Chapter 7 Bankruptcy is also known as a straight bankruptcy or liquidation. In this case, the court will appoint a trustee who will assess your assets and liabilities. The trustee will also be responsible for the sale of some of your assets to generate funds for payment of a portion of your debt. After settling your creditors with a partial payment, the court will legally discharge you of all outstanding debts.
The partial payment acts as compensation to your creditors who will not get the full payment that you owe. However, the court will prevent some of your assets from being sold for payment. Some of these items include clothes, cars, business equipment and so on.
You need to name the properties or items you would want the court to spare. Chapter 7 Bankruptcy stays on your credit history for 10 years.
Chapter 13 Bankruptcy
Unlike chapter 7 bankruptcy, chapter 13 lays out a legally binding arrangement for you to reimburse the full or part-payments of your debts over 3 to 5 years. Your assets do not pay the price here. This means you get to keep your assets as long as you repay your debts diligently and within the stipulated period
Chapter 7 and 13 both have long term negative effects on your credit score.
When Should You Declare Bankruptcy
Filing for bankruptcy isn’t the prettiest or best option when facing financial issues.
While there are cases of celebrities that have declared bankruptcy, their finances often took a big hit in the long run. However, if you are financially incapable of repaying your debt and fed up with the frequent creditor disturbance, you can resort to declaring bankruptcy.
For instance, if you are late in the payments of your mortgage loan and run the risk of losing your home, you may choose to file for bankruptcy.
In some cases, after extended periods of delay in loan payments, creditors may take further action by suing you to court which could lead to punishment and more financial constraint. Also, there is a limit on the number of times you can file for bankruptcy. For instance, if you file for a chapter 13 bankruptcy, you will be unable to file another until four years later when your debts are discharged.
You need to seek financial counselling for more details and a briefing on bankruptcy before a personal file.
Alternatives to Bankruptcy
Although filing for bankruptcy helps to eliminate or reduce your debts, it, however, has long-term repercussions and could affect other aspects of your finances.
Declaring bankruptcy should always be the last resort in any poor financial situation. If you are struggling with settling your debt there are options available to help you deal with your debt payments.
One significant impact declaring insolvency has in the long term is damage to your credit score. Filing for bankruptcy has a major negative effect on your credit history which invariably hurts your credit score badly.
Debt settlement is an excellent alternative to bankruptcy. It involves the process of offering a down payment to creditors to avoid paying a large portion of your debt.
Debt settlement provides a cheap and effective alternative to settle your debt bills. You can either settle your debt or hire a debt settlement firm to handle your debt clearance. This option will help to protect your credit score while also settling your debts effectively.
Negotiate with creditors
With a poor credit score, you will be unable to apply for a loan, find it difficult to acquire a job or suffer an increase in insurance rates. Once you file for bankruptcy, it becomes a tag that comes with consequences that will affect you in the long run.
However, you can try to negotiate with your creditors for a favourable payment plan without going through court proceedings. Some creditors are usually willing to listen to reason and agree on a better reimbursement plan for their borrowers.
While filing for bankruptcy may provide an option to get out of a financial meltdown, there are a lot of negative consequences associated with this legal action. Before you file for bankruptcy, it would be best to consider negotiating with your creditors or seek other alternatives.