Bankruptcy can be confusing and in times of economic hardship, this process can offer a way for a company or individual to find financial relief. It usually provides a variety of much-needed benefits, including relief from:
There are certain aspects of bankruptcy that need to be taken into account before deciding to file. Here is what a company or individual needs to keep in mind when moving forward with a bankruptcy action.
Bankruptcy is a legal proceeding involving a person or business that is unable to repay its outstanding debts. This process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common.
When an individual is no longer able to repay debts, the individual can consider several forms of bankruptcy depending on their financial position and when individually filing, there are different steps that must be followed depending on the type of bankruptcy that is filed, but essentially the bankruptcy court will examine the finances of the debtor and determine if debts should be discharged.
Some debts, including student loans, are not dischargeable in bankruptcy and will remain even if other debts are discharged. Further, there are several negative consequences to bankruptcy, such as it being reported on an individual’s credit report for up to ten years.
U.S. law gives individual debtors the right to petition a bankruptcy court and ask to be released from their financial obligations to creditors. This right is referred to as the law’s fresh start provision. The reasons for having such a policy fall into two categories. First, it eliminates the adverse effects that unrestricted creditor rights can have on an insolvent debtor’s work incentives, such as mandatory wage garnishments.
More importantly, a discharge policy provides a form of insurance benefit by allowing a debtor to not repay his or her debts when doing so becomes cost-prohibitive. These benefits come at the cost of a reduced capacity to borrow. Simply, bankruptcy destroys a person’s credit rating.
The “economic logic” of a fresh start is that there are both costs and benefits of adopting a discharge policy. However, there is nothing to suggest that the benefits necessarily exceed the costs.
Filing for bankruptcy relief can help you get out of debt. Depending on the chapter you file, you’ll be able to:
However, declaring bankruptcy will have serious long-term effects on the debtor’s credit. For that reason, it is important to consider the ramifications very carefully. It is not a decision to be taken lightly.
A debtor might find temporary relief at the moment, but there are long-term costs of declaring bankruptcy that have to be taken into account. Before deciding to file, ask yourself
Many creditors would rather restructure payment plans than lose everything owed to them in a bankruptcy filing. By working with a reputable credit counselor, you may be able to renegotiate your payment terms as an alternative option.
Filing for bankruptcy does not necessarily absolve a debtor of all financial obligations. Student loans and child support obligations, for example, are exempt from these proceedings, which means you must continue paying them. Add in the various court costs and filing fees, and declaring bankruptcy maybe even more expensive than simply finding another way to pay off debts.
Petitioners for bankruptcy must prove to the court that paying their debts causes undue financial hardships. This is done by subtracting monthly expenses from monthly income. The more money that is left over, the less likely a person or company will qualify for bankruptcy. The requirements are different from state to state. Anyone whose bankruptcy filing is denied must still pay court costs and legal fees.
A bankruptcy follows a debtor around for years and years afterward, and rightfully so. It reflects a history of overborrowing and an inability to honor debts. All the same, it stays on a person’s credit report for a full decade, impacting your ability to obtain further lending and housing opportunities. Even worse, companies often look at credit reports before a making job offer, so anyone who’s declared bankruptcy may be unable to obtain employment.
Although the two terms are often confused, default and bankruptcy are not the same things. Defaulting occurs when a borrower falls behind on payments. On the other hand, bankruptcy is a legal process that you can use to get your debts discharged or get on a more manageable repayment plan. People and companies who default on loans often end up declaring bankruptcy.
In personal bankruptcies, there are several different time limits to consider before bankruptcy may be filed again.
Interested in how bankruptcy works for businesses? Click here to read more.
Generally, a debtor must wait eight years before filing for Chapter 7 bankruptcy again, four years if filed a Chapter 7 and then filing for Chapter 13, six years if filed a Chapter 13 and then Chapter 7, and two years if filing consecutive Chapter 13 bankruptcies.
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