Very few people hold a positive view of bankruptcy. Society views bankruptcy as a failure, but this is inaccurate. Bankruptcy laws exist to give people a second chance and deliver a direct benefit to the public.
People with money problems should not jump to bankruptcy immediately, however. To get the most benefit from this second chance, individuals should consider the full scope of their financial situation.
Is bankruptcy the right choice?
Bankruptcy exists for those with no other options. Many easier options exist for those with money troubles, including negotiating payment plans or wage garnishment. Those concerned about preserving their credit rating should pursue other options before considering bankruptcy:
- Credit counselors: Available from non-profit organizations, these individuals examine one’s finances and spending habits. Counselors may suggest enrollment in a debt management program that helps with budgeting and prioritization. Counselors can also help set up debt consolidation loans or debt settlements with creditors.
- Disciplined budgeting: Usually, people declare bankruptcy when facing an unexpected financial catastrophe, like losing a job combined with medical bills. For those whose spending has caused their precarious financial situation, strict budgeting may help. Sometimes a second job or selling assets can turn things around, too.
- Negotiate with creditors: Creditors do not like bankruptcy as it allows people to waive some of their debt. Creditors are much more interested in helping people pay that debt back instead, even if it takes some time.
How to qualify for bankruptcy
Once a person has exhausted the above options, choosing bankruptcy is likely best. However, one still must qualify. Two types of bankruptcy exist for different levels of financial trouble:
- Chapter 7: People whose bills truly outweigh their income can file for Chapter 7 bankruptcy, sometimes called “straight bankruptcy.” To qualify, a person must earn less than the median income for their family size. Chapter 7 enables a debtor to liquidate assets to pay off what they can, while waiving other debts. Courts cannot waive the debt of student loans, child support, alimony, and court fees and fines.
- Chapter 13: This bankruptcy is for those whose income exceeds the expectations for Chapter 7 and sets up a repayment plan over the next five years. Businesses and those who have filed for Chapter 13 recently are ineligible.
Reach out to legal experts
Those exploring their options can consult with a local attorney familiar with bankruptcy law. They can help sort through finances and offer advice on options. Many lawyers may also have ready suggestions for credit counselors.