In a society known for over-extending itself, it's no wonder that so many Americans find themselves in debt and contemplating bankruptcy. While it does offer some financial relief, bankruptcy can have a lasting impact on your credit history and finances.
What is bankruptcy?
Personal bankruptcy can be loosely defined as a legal proceeding where you essentially say, "I can't pay my debts." From there, you file paperwork in Bankruptcy Court to support that claim. And although there are six types of bankruptcy, the two most commonly filed for by individuals are Chapter 13 (reorganization) and Chapter 7 (liquidation).
Filing bankruptcy is a personal choice, but it's not always the right choice for everyone.
Ways to avoid bankruptcy
When trying to determine the best tactic to avoid bankruptcy and come up with alternatives to bankruptcy, a good first step is to review your credit report. The credit report will show you how much you owe and to whom. The information on your credit report will help you create a plan for paying off your debts.
Once you know your total debt and where it came from, you can start to explore your options, such as:
- Eliminating credit cards — Having too many credit cards makes spending and increasing your debt too easy. Try to keep one credit card for emergencies.
- Selling unnecessary items — Sell off items that you can live without. It will give you cash to either pay off creditors or make loan payments.
- Exploring debt consolidation — Instead of struggling to pay five high-interest rate credit card bills each month, take out a debt consolidation loan and pay a lower monthly payment to one creditor.
- Trying credit counseling — Credit counselors can give you the financial expertise you need before it's too late. These experienced professionals specialize in helping people who are overwhelmed with bills they can't pay. In fact, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 now requires those who wish to file for bankruptcy to seek credit counseling before an official bankruptcy declaration can be made.
- Creating a budget — If you spend more than you earn, you are living beyond your means. Creating a monthly budget that includes all your expenses and income can help you see where you're spending and help cut unnecessary expenses.
Why bankruptcy is never an ideal solution
Many are drawn to personal bankruptcy thinking that it is a quick and safe way to get financial protection. But this is not really the case. Here are a few examples of some serious downsides:
- Loss of property — You will not be allowed to keep properties you are paying for unless you somehow continue to make payments.
- Debt and your bills do not go away — You will still be responsible for paying any secured loans, like your mortgage, as well as student loans, child support and alimony.
- Your outstanding debts still transfer to others — Any individuals who acted as cosigners for you will still owe that debt. They are not excused from these debts just because you declared bankruptcy.
After you have researched all your options and exhausted all possible alternative bankruptcy solutions, if filing for bankruptcy remains a possible solution, contact a bankruptcy lawyer.