Are you in a situation where you feel it’s impossible to catch up on paying fallen bills? Whatever your reasons are, payment delays happen sometimes. Though it can cause long-lasting financial challenges and stress, it’s not the end of the world.
What is Bankruptcy?
Bankruptcy is a legal process wherein people or businesses that cannot pay back their debts to creditors ask for relief from some or all of their obligations. In most cases, it is imposed by court order, often initiated by the debtor. Due to the complexities of this process, hiring a bankruptcy lawyer is always the best option.
Generally, bankruptcy protects you from foreclosure or repossession, wage garnishments, illegal debt collection harassment, and utility shut-offs. It also helps you eliminate unsecured debt, such as your credit card. But you must prove that you can’t repay your debts.
Types of Bankruptcy
Your attorney helps you to ensure your bankruptcy goes as smoothly as possible. They let you understand which type of bankruptcy is best for your situation. Both types relieve debts in different ways, and you are expected to cover your court costs, including attorney fees.
1. Chapter 7 Bankruptcy
Individuals and businesses can opt for Chapter 7 bankruptcy, which typically lasts from three to six months. Also known as “straight bankruptcy,” most people choose this type when filing for bankruptcy. You are required to sell any non-exempt assets, including expensive clothing, jewelry, a residential property that’s not your primary home, coin collection, etc.
The sales will go to your creditors. Remember that Chapter 7 bankruptcy won’t get you out of child support, taxes, student loans, and court-ordered alimony. Furthermore, it may cause you to lose your property, and the negative bankruptcy information will be on your credit report for 10 years.
Click here for more information about Chapter 7 bankruptcy.
2. Chapter 13 Bankruptcy
This allows you to keep your property while partially or completely repaying your debt. The court and your lawyer will negotiate a three to five-year repayment plan. Depending on the negotiation, you may repay a part or all of your debt during that period.
After completing the agreed repayment plan, your debt will be discharged, even if you only paid some of the amounts you owed. Your credit report can be canceled after seven years, and you can file again under this chapter two years later.
Tips on How to Avoid Bankruptcy
Prioritize Your Debts
Plan ahead of time. Allot a specific budget for your necessities, such as food, transportation, housing, utilities, and other legal obligations like child support. List down all your debts and focus on those with the highest interest rate.
You can make minimum payments to the other debts, so you could pay as much money as possible to your debt with the highest interest rate. After paying off the highest, move on to the next, and so on.
Cut Your Expenses
Since your main goal is to pay your debt, make major sacrifices. Cut back on unnecessary expenses, such as clothing, dinners out, movies, etc. Afterward, you can look for a cheaper house or car as long as you minimize their costs.
Negotiate with Your Creditors
When you realize that you can’t pay your monthly obligations, talk to your creditors immediately. If possible, ask if they can reduce interest rates, change the payment terms, etc. Always remember that after agreeing with a creditor, stick with it.
Beware of Debt Consolidation
Debt consolidation loans may be tempting, but this may not be the solution. A debt consolidation loan is getting a loan to pay off all your debts with one monthly payment. For instance, if you avail of a home equity loan, your home is used as collateral, which you could lose.
Avoid Debt Settlement Services
Some companies offer to negotiate a settlement with creditors with a fee. In most cases, they can ask for 15% of the total amount of your debt as a fee. It may sound like they can relieve your debt problem, but this can get you into more trouble instead.
Consider Debt Management Services
If you think you can’t do it alone, seek the help of professionals. This means that in addition to bankruptcy lawyers, you can also approach non-profit organizations. Though it’s not free, debt management fees are much lower than debt settlement companies.
Every Situation Is Unique
Every person’s situation is different. Some may say, “we went with this bankruptcy lawyer,” and others say, “non-profit organizations are better.” Unfortunately, sometimes bankruptcy is the best option for others.
What’s more important is to avoid bankruptcies from happening again by prioritizing your necessities.