Sometimes declaring bankruptcy is the best option, but how can you know? Here’s what to consider before you file for bankruptcy.
It’s easy to feel alone when considering declaring bankruptcy, but you’re in good company. The US saw approximately 31,178 personal bankruptcy cases in 2022. This is a 6% higher figure than 2021’s 29,335.
If you think you may need to file for bankruptcy, there are some things that you need to consider first. Read on to learn when you should start the process of filing for bankruptcy with an attorney.
The Pros and Cons of Filing for Bankruptcy
Bankruptcy is a legal process intended to assist those that cannot pay outstanding debts. This may include personal or business loans, credit card balances, medical bills, and home mortgages.
There are two main types of personal bankruptcy proceedings.
Chapter 7 bankruptcies eliminate approved debts and can discharge secure debt if you give up the attached property. Basically, you liquidate your assets and pay off the debt with cash.
Chapter 13 bankruptcies create a repayment plan so that you can easily pay your debts. Unsecured debts may be discharged after you make the final payment.
Benefits of Filing for Bankruptcy
Bankruptcy can quickly alleviate the financial pressure that you are experiencing. It can decrease your stress so that you can get back on track.
It also frees up some of your income that previously went toward outstanding debts. You can use this money to pay your rent, mortgage, or utilities. It also makes budgeting for basic necessities easier.
Contrary to popular belief, filing for bankruptcy can also benefit your credit score. They do plummet your score quickly and drastically.
However, many people’s credit scores are going down steadily because of missed payments already. You won’t need to worry about these hits post-bankruptcy because you will no longer have outstanding debts.
In the long term, you will likely come out on top. 43% of those who file for bankruptcy have good credit scores (640) after 1 year. 65% reached the 640 mark after 2 years.
Downsides of Declaring Bankruptcy
There are, however, some disadvantages of declaring bankruptcy. It can be an expensive process. Chapter 7 bankruptcies cost $1000-$1750 out of pocket. Chapter 13 bankruptcies cost about $3300.
However, this is usually well worth getting your life back on track. Working with attorneys that provide flat-fee services can reduce costs by eliminating hidden fees. It can also help you budget better since you’ll know what you’re paying upfront.
You also may lose valuable assets depending on your income, the equity in your assets, and the type of bankruptcy you file for. For example, your trustee might need to sell your house or car to pay back creditors. Talk with a lawyer to make sure that the cost is reasonable.
So, When Should You File for Bankruptcy?
As you can see, bankruptcy has its downsides. However, contrary to popular belief, it isn’t a bad idea in some cases. There are many situations in which bankruptcy can benefit you.
If you are feeling stressed because of your debts, that’s a sign that you may want to consider filing for bankruptcy. Stress can cause poor performance in the workplace and deteriorate your mental health. You might make more money or do better at work after eliminating stressful debts, which means that you can begin paying back bills and improving your credit score faster.
Creditors Are Bothering You
Many people’s stress stems from the fact that debtors are constantly bothering them for money. Collection calls are a nuisance, and they can cause a lot of anxiety.
Worse, though, are when creditors begin to take financial action. You may find yourself with wage garnishments or even lawsuits. For those who are in debt, this financial loss may be more than you can reasonably bear.
When you go bankrupt, you erase these debts. You won’t be harassed by collectors and your wages won’t be garnished. Plus, since bankruptcy is a legal process, you will never be credibly threatened with lawsuits from collection agencies.
Your Loans Qualify for Bankruptcy
Contrary to popular belief, not all loans qualify for bankruptcy. Most do, but you cannot alleviate the following debts by declaring bankruptcy:
- Student loans
- Taxes (both federal and state)
- Most local taxes
- Credit card debt specifically used to pay taxes
- Child support
If you’re unsure of whether or not your debts qualify, an expert bankruptcy attorney can help you figure it out.
There Are No Preferable Alternatives
There are several steps that you could take prior to bankruptcy. They can save you some of the unpleasant consequences of bankruptcy if successful. They also may be necessary prerequisites for some bankruptcy court proceedings.
Negotiate with creditors without involving the courts. They may agree to a repayment schedule that spreads your payments out over a longer timeframe. They also may agree to erase some of your debt if you do not involve the legal system.
Loan servicers could grant your forbearance on mortgages. You would be allowed to stop making payments for a while or could pay smaller monthly intervals. If you owe money to the IRS, you also may be able to settle for an amount that’s less than you owe.
All of these are options to consider, but they are not necessarily superior alternatives to going bankrupt. Remember that in some cases, bankruptcy is actually the best way to clear your debts and start over.
There’s no shame in filing to have the weight of those debts erased so that you can begin living a better life.
Talk With a Bankruptcy Attorney Today
Going bankrupt is often considered a last resort for those who cannot pay their debts. However, in some cases, it is the best option for those looking to start over. Now that you know when to file for bankruptcy vs when to consider other options, it’s time to get started.
Johnson/Turner legal associates are committed to providing you with expert legal advice and assistance when declaring bankruptcy. Our services come at a flat fee cost rather than an hourly rate so there are no hidden fees. Contact us to book a Quick Guidance call and discuss your specific case.