Bankruptcy helps you repay the debts without selling your properties. The best time to file for bankruptcy is when you have tried all possible ways to pay your debt, but still couldn’t repay your debt. It’s best to file for bankruptcy if you are getting calls from your creditors and your debt keeps increasing. Let’s see what bankruptcy is and what are its pros and cons.
Overview of Bankruptcy
Bankruptcy acts as a tool that reduces your debt burden by discharging your debt. It’s the best way to deal with the increasing debt, especially when your creditors have started garnishing your wages. While bankruptcy can save your property from foreclosure and help repay your debts, it can affect your credit score in the long run. Bankruptcy is often seen as the last resort to repay your debt and prevent your assets from liquidation. It can also save you from home foreclosure.
Common Types of Bankruptcy
There are six different types of bankruptcy, but the most common types are listed below.
Chapter 7
The most common type of bankruptcy is Chapter 7, in which your assets are used to repay your creditors. A portion of your property is sold and the remaining amount is discharged. The biggest benefit of chapter 7 bankruptcy is that certain types of your assets will be excluded from liquidation. This includes your clothing, car, pension, and household items.
Chapter 13
Chapter 13 bankruptcy involves a court-mandated repayment plan, which allows you to repay your debt over a period of 3-5 years. Your creditors can’t force you to liquidate your assets to repay the loan as long as you follow the repayment plan.
You don’t have to sell your home or any property. Just make sure you stick to the repayment plan put forth by the court and your debt will be repaid within 5 years. If a percentage of your debt is still due after this period, it will be considered discharged.
Chapter 11 (primarily for businesses)
Businesses that want to reorganize their debts file for Chapter 11 bankruptcy. The repayment plan must be in the best interest of both the debtor and the creditor.
Indicators that Bankruptcy Might be a Viable Option
Bankruptcy makes sense when you have reached a stage where all your efforts to repay the debt have failed and there’s still a large volume of debt due. If the creditor has filed for wage garnishment, i.e. taking a portion of your income from your employer to recover their amount, consider filing for bankruptcy.
Pros and Cons of Filing for Bankruptcy
Before you file for bankruptcy, you must weigh the pros and cons of it to avoid facing legal issues. Here are the pros and cons of bankruptcy.
Advantages of Bankruptcy
Bankruptcy offers many perks. For starters, it can save your business, home, and other properties from foreclosure. Here are some other perks:
- Stops creditor’s harassment
- Communication can help you negotiate your debts with the creditors
- The amount that you are unable to repay even after the liquidation of assets and the repayment period will be discharged by the court.
- You don’t have to liquidate all your assets
- You can start fresh
Disadvantages of Bankruptcy
While bankruptcy can help repay your debt, it doesn’t come without disadvantages. Let’s check out a few common cons of bankruptcy.
- It affects your credit score, making it difficult for you to get loans in the future
- You will still have to liquidate your assets
- Filing for bankruptcy comes with legal expenses, such as hiring an attorney and court fees
- Your bank account can be frozen
