When to Consider Bankruptcy

Knowing when to consider bankruptcy helps navigate debt & stabilize your life. Read when to consider bankruptcy & get your life back on track again now.

Amassing debt is never a goal consumers intentionally attempt to achieve. The weight and burden caused by owing a seemingly insurmountable amount of money wreaks havoc on your life. It can also affect the life of your family. Knowing when to consider bankruptcy helps you navigate your debt to once again enjoy life on your own terms.

Losing a job, accumulating medical debt, or going through a divorce all have common negative outcomes on your ability to pay your bills. Has rising credit card debt impacted your life in serious adverse ways? Are you unable to make your mortgage or rent payments, causing you to potentially face foreclosure or eviction? Read ahead to learn vital information about when to consider bankruptcy and get your life back on track again today.

When Debt Gets Too Deep

The inability to pay your bills is a terrible feeling most consumers experience at some point during their lives. It is perhaps partially comforting to know you are not the only person who goes through financial struggles. When debt becomes too deep, however, direct action is often the only way to begin resolving the issues. Multiple options for settling your debt are available including debt consolidation programs/loans, consolidating credit card accounts & tax debt relief via the Internal Revenue Service (IRS). When none of these options apply, it is time to consider filing for bankruptcy.

Different Types of Bankruptcy

Six types of bankruptcy options are available to help solve various and specific financial issues. Bankruptcy types are categorized by a chapter/numbering system as implemented in the U.S. Bankruptcy Code. Of the six chapters, one is designated for family farmers & fisherman, another is specific to situations involving debtors with assets in multiple countries and a third is designed for municipalities in financial crises. Three types of bankruptcies (Chapters 7, 11 & 13) are available for individual consumers. Filing a Chapter 11 bankruptcy is also permissible for businesses. Below is a helpful outline of Chapters 7, 11 & 13 bankruptcies and how each might apply to your situation.

Chapter 7

Chapter 7 bankruptcy is the most common type of bankruptcy filed in the U.S. to date. Otherwise referred to as liquidation bankruptcy, filing for this chapter allows an individual to essentially liquidate (sell) his or her property and/or assets as a means of eliminating some or all applicable debt. Property and possessions are surrendered until all included debts are satisfied in full. Child support, alimony and specified tax debts are not qualified as eliminable debts under all bankruptcy chapters, including Chapter 7. Filing for Chapter 7 is best suitable for debtors with little or no disposable income who also need a financial reset on their lives. Completion time (from initial filing to all debts fully paid) commonly takes ninety to one-hundred days, which means relief from your debt occurs relatively fast in Chapter 7 cases. However, additional time is required up front to enroll in a credit counseling course before permission to file Chapter 7 is granted.

Chapter 11

While Chapter 11 bankruptcy is available for individuals it is more commonly filed by struggling businesses. This of course applies to sole proprietorships owned/operated by individuals and/or the self-employed. Chapter 11, also referred to as reorganization bankruptcy, permits business owners to maintain control of applicable operations without requiring the liquidation of all assets. Interest rates and payment values become subject to negotiations, which potentially provides additional relief. Chapter 11 cases are filed in a bankruptcy court, which has jurisdiction over the region in which the business is located. Chapter 11 cases are either voluntary or involuntary, the latter of which are filed by qualified creditors.

Chapter 13

Filing for Chapter 13 bankruptcy, which is also referred to as a wage earner plan, is designed for consumers who earn a regularly paid income to satisfy some of all their debts via the creation of a legally binding repayment plan. Debtors suggest an installment-based repayment plan over the course of three to five years. This type of plan allows you to make affordable payments and still satisfy applicable debts. Most Chapter 13 plans are established for three years unless extenuating circumstances warrant an extension approved by an appliable court. No Chapter 13 repayment plans are permitted to last beyond a five year maximum. However during the active plan no included creditors are permitted to conduct additional attempts at debt collection.

What Leads to Filing for Bankruptcy?

Multiple common real-life scenarios cause a person or business owner to file for bankruptcy. Unemployment, medical bills and divorces are the most common reasons individuals file for an applicable bankruptcy chapter. Long-term unemployment is hard on anyone who experiences it. When a person with significant debt loses his or her job, however, sometimes filing for bankruptcy is the only solution.

A common myth & misunderstanding about outstanding medical bills is that they have no adverse impact on your FICO score and credit status with lenders. The three main credit bureaus allow up to 180-days for you to resolve unpaid medical charge-offs prior to allowing them to impact your FICO score. Once the threshold is crossed, however, medical debt lowers your credit rating just like any other negatively reported accounts.

Divorces are hard on individuals, couples, children & bank accounts. Legal expenses for contested divorces are often astronomical. Loss of property and wealth, in addition to alimony payments cause many people to go deeper into debt than they are capable of enduring without assistance.

Business owners filing for bankruptcy commonly do so because of adverse market conditions (recessions) or poor financial planning. Sometimes a business owner gets divorced and his/her spouse is awarded part of full ownership of the company in the settlement. Additional reasons businesses file for bankruptcy include:

  • Unprofitable location.
  • Competitor lawsuits.
  • Key employee resignations.
  • Natural disasters causing damage to building structure.
  • Serious illness of a CEO or other vital executive.
  • Fraud.