You try to maintain financial stability for your young family, but sometimes events lead to the extensive accumulation of debt. Try as you might to staunch the flow of money leaving your home, the debt may be too overwhelming to get a handle on. In a situation like this you can push through as best as possible to pay down the debt or you can take a final, giant step down and declare bankruptcy.
While constantly discussed in the framework of business debt, personal bankruptcies are also filed on a regular basis – even more so after the events of the Great Recession. Though this type of financial filing wipes debt from your record, it also leads to long-term circumstances for your monetary future. If you’ve been thinking of declaring bankruptcy, here are some things to consider.
What is Bankruptcy?
Many people state they’re bankrupt, but a federal court is the only institution that declares such a financial state. Via this judiciary process, individuals and businesses are able to eliminate their debts or pay them off under the protection of the court. This protection, known as an automatic stay, prevents creditors from collecting on their debts until your financial situation is stabilized.
What Are the Types of Bankruptcy?
There are three forms of bankruptcy, known as Chapters. In most common of these, Chapters 11 and 13, a reorganization plan for debt pay-off is created for individuals and companies who own approximately $1.5 million worth of secured and unsecured debt. In these scenarios, property is maintained while paying off all or a portion of the debt. Under a Chapter 7 plan, individuals or companies have their debt wiped away in exchange for liquidation of some or all of their property.
How Do I File for Bankruptcy?
If filing a Chapter 11 or 13, the process begins with the creation of a disclosure statement detailing reorganization efforts and debt payments. Once the court approves the statement, it needs to be approved by the creditors, including those who receive only a partial payment. The plan is then actioned through a bankruptcy agent who deals with the individual payments. The bankruptcy is discharged once the court is satisfied and a majority of the creditors are paid.
What are the Downsides to Bankruptcy?
Besides the emotional toll it takes on you and your young family, there are other physical downsides to bankruptcy filings. The first is the upfront cost. Your financial situation may be so dire you can’t afford the $300 fee to file a Chapter 13 or the $1000 required for a Chapter 11. If dealing with many creditors, a bankruptcy can be contentious as your legal representatives attempt to make a deal for a smaller total payment.
There are also limitations on what debts may be part of a filing. Unless exceptions are made, alimony, child support, and student loans can’t be added to a reorganization plan. If filing for Chapter 7 bankruptcy, the greatest downside is the loss of property, including vehicles and your residence. The longest-lasting downside is the effect on your credit rating. Chapter 7 and 11 filings and non-discharged Chapter 13 plans remain on credit reports for ten years from the date filed, causing significant issues if looking to apply for any addition credit.
In the end, make sure to consult with a financial advisor before deciding on a bankruptcy filing. They may provide some addition guidance to allow you to pay off your debts without heading to court.