Filing For Bankruptcy: When and the Reasons Why
For many people, bankruptcy can be a daunting proposition. However, when done right, bankruptcy can save you money, preserve your peace of mind, and help you get back on your feet financially.
There are various types of bankruptcy filings. For instance, Chapter 7 bankruptcy is the type of bankruptcy you will file to clear away different types of unsecured debts. In other words, filing for Chapter 7 bankruptcy is your option if you are behind on your bills, and you can no longer afford the living and monthly expenses.
Common Reasons for Bankruptcy
Bankruptcy statistics in the United States are alarming. There has been a noticeable rise in the number of people who are unable to pay off their debts. Congress addressed the issue through legislation that makes it hard to qualify for the status.
The following are some of the most prevalent causes of bankruptcy in the United States:
Regardless if you resigned, were laid off, or got terminated from work, the loss of income can be devastating. While some are fortunate enough to receive severance packages, others find pink slips on their lockers or drawers with little or no prior notice.
This situation can worsen if you don’t have an emergency fund available. Unfortunately, Bankrate’s 2019 Financial Index Poll indicated that nearly three out of ten Americans do not have any emergency savings available to help cushion a job loss or other financial crisis.
If you are unable to find gainful employment for an extended period, you will likely not be able to recover from the lack of income fast enough to keep creditors at bay.
In 2019, the American Journal of Public Health published a study revealing an alarming statistic: 66.5% of bankruptcies in the United States are attributed to the inability to pay high medical bills.
Injuries and severe and rare diseases can easily result in hundreds of thousands of dollars in medical bills. These medical bills can quickly wipe out retirement or savings accounts, college education funds, and even home equity. Once all those options have been exhausted, bankruptcy may be the only alternative left.
Inadequate or Excess Use of Credit
Some people find it very difficult to control their spending, and they spiral out of control. When this happens, they can end up not being able to pay even the minimum payment for each debt. For those who cannot borrow money from families and friends to pay their obligations, bankruptcy is often the inevitable option.
Separation or Divorce
Marital dissolution can cause a massive financial strain on both partners. For starters, they have to deal with astronomical legal fees. They also need to attend to child support, division of marital assets, and alimony. After the split, they also have to deal with the cost of living on their own.
Loss of property due to casualty (i.e., floods, earthquakes, or tornadoes) or theft for which they are not insured can force some people to file for bankruptcy. Many homeowners are unaware that they need to take out separate coverage to be covered against certain events like earthquakes.
When to File for Bankruptcy
For many, living in debt has become the accepted norm. So how do you gauge when to throw in the towel and file for bankruptcy? The following questions can help you assess your financial danger zone:
- Are you making only the minimum payments on your credit cards?
- Are bill collectors always chasing you?
- Do you find the idea of sorting your finances scary?
- Do you use your credit cards to pay for your necessities?
- Are you unsure about the exact amount you owe?
- Are you looking into consolidating your debts?
Assessing Your Situation
If you answered yes to two or more questions, you might need to give your financial situation some serious attention. Simply put, bankruptcy is an option when you owe more than you can afford to pay.
To help you figure out where you are financially, do an inventory of all your liquid assets. Don’t forget to include bonds, stocks, vehicles, real estate, retirement funds, college savings accounts, and other non-bank funds. Provide a rough estimate for each.
Next, collect and add up all your credit statements and bills. If your assets’ value is way less than the amount you owe, declaring bankruptcy might be an option for you. A word of caution: Bankruptcy should not be taken casually. It is crucial to keep in mind that it is not the quick and easy cure-all for out-of-control debts.
How to Declare Bankruptcy
There are two primary ways to declare bankruptcy. The more traditional route is for an individual to file for bankruptcy voluntarily. Another way is through creditors who ask the court to order a person bankrupt. As a general rule of thumb, consult with a lawyer before you file for bankruptcy to determine the best fit for your circumstances.
Chapter 7 Bankruptcy
Chapter 7 is sometimes known as “straight bankruptcy.” In Chapter 7 bankruptcy, your assets will be liquidated to pay off as much of your debts as possible. The cash is then distributed to creditors like credit card companies and banks.
Within four months, you will receive a notice of discharge. However, your bankruptcy record will remain on your credit report for ten years. For most people, Chapter 7 is synonymous with being given a quick and fresh start.
Chapter 13 Bankruptcy
Also known as reorganization bankruptcy, Chapter 13 enables individuals to pay off their debts over a three to five year period. For those with a predictable and consistent annual income, Chapter 13 offers a grace period.
Once the court has approved the bankruptcy, the creditors will no longer contact the debtor. Bankrupt individuals will then continue to work and pay off their debts over the years. They will also be able to keep their properties and possessions.
Declaring Bankruptcy: Daunting but Sometimes Necessary
Getting out of debt can be hard, and sometimes, you’ll need all the help you can get. That’s the reason bankruptcy laws exist — to protect you and the creditors. In some cases, you would be doing yourself a disservice when you don’t file for bankruptcy.
It would also help if you looked at bankruptcy from a different perspective. Rather than seeing it as a negative disruption you can do without, consider it the fresh start you so badly need!
About the Author
Sam Mazella is the Marketing Director of The Peterson Law Firm, the go-to practice in Arizona when facing divorce, child custody, child support, and financial crisis. In his spare time, he enjoys cooking and going on camping trips with his family and friends.