Things you you need to know before filing for bankruptcy Declaring bankruptcy is a serious step taken to overcome an overwhelming financial crisis caused by debt accumulation. It is one way of getting out of debt but should only be used as a last resort. Bankruptcy does not mean getting away without paying off your debt. You have to pay back the debt anyway, and your credit score will also be affected. It is therefore important to be well-informed about the types of bankruptcy and the consequences of filing for one. In the U.S., there are two types of bankruptcy that can be filed by individuals: Chapter 7/Liquidation Bankruptcy: In this liquidation process, the debtor’s assets are sold by a trustee appointed by the court, and proceeds of this sale are distributed to the various creditors. Individuals are not allowed to sell any of their property or pay off any debts without prior approval from the court. Chapter 13: In this type of bankruptcy, the total debt amount is renegotiated with the court’s approval by creating a plan and organizing the terms of repayment. In this type of bankruptcy, the total amount of debt is reduced drastically and can be paid off in three to five years. Chapter Thirteen stays on a person’s credit report for seven years. However, before filing for Chapter 7 or Chapter 13 bankruptcy, it is wise to weigh your alternatives and understand the ripple effects. So always ask yourself, “Is bankruptcy for me?” In a scenario where bankruptcy seems to be the most viable solution to break free from debt, it is imperative to consider and carefully research every option available to you. Bankruptcy is not a quick fix solution; it has long term consequences including the following: • An individual’s credit report is hit for 7 to 10 years • It is difficult to qualify for new loans and credit for several years • Buying or even renting a home is difficult • Your insurance rates will increase as many insurance carriers now look at credit scores when underwriting a policy Try the following alternatives before proceeding with a bankruptcy filing: • Renegotiate with the creditors. Try talking with your creditors to negotiate a settlement for a longer payment schedule. They would rather settle a debt than have it released into bankruptcy. So work out a settlement rather than be bankrupt. • Do you have assets? If so, liquidate them. If you own a house or a vehicle, then you could sell it to generate sufficient cash to pay back your creditors. If you have a good chunk of investments and they are not in an exempt account, then it is possible that you will also be forced to liquidate them anyway. • Refinance your house to pay off high interest debts. There are a number of lower interest rates available. Look for a better option. • Consolidate debts into a single loan with a better rate. If you have multiple loans, consolidate them. By doing this, you not only reduce the number of bills you have to pay, but you also reduce the interest rates. You can repay more than the minimum amount and eliminate the debt faster. • Borrow money from friends or relatives. They are your best bet. Borrowing interest-free from relatives and friends can help you repay your debts faster. • Reorganize your lifestyle. Make some compromises with your lifestyle and free up funds to repay debts. Cut down on all unneccessary expenses. • Go for credit counseling. Contact a credit counselor who can help you get out of debt and avoid declaring bankruptcy. A debt management counseling expert can help with effective money
management. In some cases, they also set up a debt settlement program. While you may have to pay a fee for this, it can help you avoid bankruptcy and lead a debt-free life. There are situations where bankruptcy is the only option, but it is in the best interest of your financial future to avoid it. More often it is possible to get out of a debt trap without having to resort to bankruptcy. So weigh your options carefully before making a decision.