When you are overwhelmed by debts, filing for bankruptcy might be your only way out. Being overwhelmed by debt means that you are extremely behind your mortgage payments and on the verge of foreclosure, debtors are harassing you, you cannot meet your monthly payment obligations and other problems associated with being in debt. Filing for bankruptcy might be an option, or it might not be. You need to assess your situation carefully before you do.
In some cases, declaring bankruptcy can do away with or reduce your debts, save your property and keep all your debtors at bay. However, it affects your credit score for the next couple of years and you also have to factor in the cost of filing for bankruptcy. It makes it difficult for you to get a loan in the future, but you can recover after some years.
How to Evaluate Your Financial Situation?
Below are some questions you can evaluate to help you understand your financial situation better.
- Do you owe more than you can afford to pay?
- Are you unable to control your financial situation?
- Are debtors harassing you with payment collections that you cannot meet?
- Do you make only minor payment amounts toward your credit cards?
- Are you stressed at the thought of sorting out your financial situation?
- Are you using your credit cards to pay for things you actually need?
Bankruptcy is a situation whereby you owe more than you can afford to pay. To determine if bankruptcy is the only solution you have, list down all your liquid assets, including real estate, bonds, stocks, retirement funds, vehicles, bank account savings, etc. Calculate a rough estimate of all of them, then calculate all your debt and bills.
If the value of your assets is less than the amount of debt you owe, then filing for bankruptcy might be a viable solution to get you out of your difficult financial situation. But you should know that declaring bankruptcy is not easy, so you cannot approach it casually. You may enlist the help of a bankruptcy lawyer to figure out the best solution for your financial circumstances. Federal courts handle bankruptcy cases, and the most common types are chapter 7 and chapter 13 bankruptcy claims.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the most common, also known as liquidation or straight bankruptcy. A trustee appointed by the court will liquidate your assets to knock down as much debt as they can for you. But some properties are exempt from liquidation due to certain limits, for instance, your household goods, tools of trade, car, pension, and a portion of your home equity. The cash obtained from selling your assets will be disbursed to creditors, including banks and other credit card companies.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is a better one if you have properties you want to keep. Also known as reorganization, it results in a court-approved plan to repay your debt in a 3-5years period. It may discharge some of your debts and doesn’t require liquidating your assets. Therefore, creditors do not harass you and you can continue working to repay your debts.
Common reasons to file for bankruptcy include unemployment, extremely overextended credit, large medical expenses, marital problems and other financial circumstances.