In the distant past, there was no way for a person to go bankrupt and clear their debts. Instead, they had to go to debtors’ prison and hope that, eventually, somehow, somebody would bail them out.
Today, though, things have changed. Being in debt doesn’t lock you into a life of servitude and incarceration. Instead, you can choose to go bankrupt and escape the cycle.
Going bankrupt is a tool that citizens can use to improve their lives. Yes – it comes with costs and a certain level of stigma. But it is better than having creditors endlessly pursue you for money that you can never hope to repay.
In many cases, bankruptcy can reduce and eliminate large debts. Some debts are impossible to escape. But you can free yourself from most of them by using this legal facility. Bankruptcy helps to keep creditors at bay and it is a great option if you are genuinely unable to pay back the money that you owe.
What Are The Consequences Of Bankruptcy?
Bankruptcy isn’t free. If it was, everyone would be doing it to get out of repaying the money that they owe. However, the consequences are usually better than living a life of destitution.
So what are the negative consequences? Well, the first is a decline in your credit rating. Declaring bankruptcy can crater your credit score – which is annoying if you have spent a long time trying to build it. This can make it more challenging to take out credit cards and loans in the future.
More worryingly, it can also go on your permanent financial record. So even in the distant future, employers and financial institutions might view you as a higher risk. You may struggle, therefore, to get the job you want or take out a mortgage.
There are also limits on the number of times that you can use bankruptcy. Most people can get away with doing it twice. But on the third occasion, you’ll have to go through the courts to explain what went wrong.
Declaring bankruptcy, therefore, limits your options in life. You can’t keep starting businesses that fail and then bring down your personal finances with them. Once you declare bankruptcy, you have to be more cautious.
How To Avoid Bankruptcy
The case of bankruptcy indicates an important difference between federal criminal law vs state criminal-law. Federal jurisdiction covers issues such as bankruptcy and antitrust, while state criminal laws deal with things like arson and rape.
There are alternatives to going through a bankruptcy filing at the federal level. These allow you to reduce your debts without taking on any legal baggage.
For instance, you can decide to negotiate with your creditors outside of the courts. Many will be willing to reduce your interest payments in the hope that they can get more money than if you went bankrupt. In many cases, creditors will agree to allow you to spread payments over a longer period of time.
You can also try to reduce how much you pay on your mortgage. If you’re under financial stress, lenders may allow you to change the terms of your mortgage, reducing the repayment of the principle. Again, this solution works in everyone’s interest. It supports your negative cash flow and it provides the bank with more income over the long term.
Sometimes, you can consolidate loans to reduce the total interest that you pay. Loan consolidation companies pay off all your individual debts for you and then ask you to pay a single monthly payment to them. Often, they are able to offer you a cheaper and more convenient overall deal. They also don’t put limits on how much you can pay back in one go.
Even the IRS is often willing to offer you a compromise. Bankruptcy clears your tax debts, so the tax authorities often want to find ways to help people pay. They may be willing with the help of a solicitor to reduce the total amount that you owe or offer more generous payment plans that give you more time.
How To Know If You Should File For Bankruptcy
Figuring out whether you should file for bankruptcy can be tricky. It is a complex decision. If in doubt, speak to a counselor or specialist and ask them what you should do. Usually, you can get some very sound advice indeed.
In many cases, bankruptcy is not through any fault of your own. Sometimes life circumstances force you to take on unmanageable levels of debt because of a health issue or a large car expense.
In these cases, the only option is to file for bankruptcy to get a fresh start.
If there are alternatives to bankruptcy, though, you should always take them. Bankruptcy is very much a last resort when you have no other options left. It is something that you should use when you can no longer afford to make interest payments on your outstanding loans. Your financial ship should be sinking.
Please note that if you do decide to file for bankruptcy, you will not be alone. It is something that hundreds of thousands of people do every year to help get them out of sticky financial situations. Even very wealthy people file for bankruptcy when they can no longer sustain their debts.
How Does The Bankruptcy Process Work?
Filing for bankruptcy requires sharing your financial position with the courts. You’ll need to list things like your income, debt, and assets. The courts will then evaluate these and determine whether you are a candidate for bankruptcy or not.
After you file, your creditors will get together for a meeting. During this meeting, they will ask questions about your finances and whether you can still repay them. A bankruptcy judge will then decide your case on your behalf.
You must also attend something called a debtor education course before the courts will discharge your bankruptcy. Here, you learn about things such as basic money management and how to deal with debts. You’ll also learn things like how to properly budget and take control of your household finances.