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Bankruptcy - Is it worth it?

BankruptcyMany people who find themselves over their head in debt may think the best thing to do is to wash it all out and start all over again. When it comes to getting out of debt, that is probably the fastest and the easiest way to do it. But if you're looking at boosting your credit score, it could put your life on credit back quite a few years. You won't have to pay back all the money you owe, but you definitely won't be seeing much more credit in your near future.

Every year millions of people turn to bankruptcy lawyers for help when they can figure out no other way. Turn on your television late at night, and you're sure to find a bankruptcy lawyer promising to help you clean your record and get you back in good stead with your creditors.

Still, few people realize what actually happens when they declare bankruptcy. While there are many good reasons to do it there are probably just as many reasons to think twice about making this decision.

Another option many choose is debt consolidation. This is a system that allows you to get a loan that Will pay for all your debt giving you one single payment to pay monthly. Doing debt consolidation can be a great choice for many because it often lowers the amount of money you need to pay every month and it means you'll have to pay less interest as well. So with this option on the table, why is it that so many people would rather consider bankruptcy as an option?

The answer is simple; it's the easy way out. Yes, going in front of the judge may be stressful and unnerving, but the idea of walking out without owing a dime is more tempting than the alternative. If you are considering bankruptcy, it is important that you give this idea some careful thought. In more cases than not, there are some surprises you'll find when on the road to bankruptcy, and it's better to find out about them beforehand rather than to stumble across them later on.

There are cases though, where bankruptcy is the best option, however, when it comes to rebuilding your credit it is not often the best solution. In some cases, it will cause more problems than it will actually solve. Those who have filed find that it is much more difficult to get approved for credit, and they pay higher interest rates when they do. Add to that, it is much more difficult to get a dispute cleared from your report after you have filed for bankruptcy. It pays to fully understand the process before you make a decision.

The Pros and Cons of Bankruptcy 

No doubt about it, declaring bankruptcy is a difficult decision to make. Your choice will have an impact on your financial reputation for many years to come. While it can improve your immediate circumstances, it can also complicate things later on.

The Cons: Whether you decide to file a Chapter 7 or a Chapter 13 bankruptcy, there will be a negative mark on your credit that will remain there for up to 10 years.

You could lose a great deal of your personal property as the bankruptcy trustee may declare it to be sold to offset some of your debt.

You will lose access to your credit cards.

Getting a mortgage for a home could be even more difficult. Once you declare bankruptcy, it may be more difficult (if not impossible) to do so later if you have another negative setback on your credit.
It will not relieve you of all of your debt. Child support, alimony, and government loans are exempted. You will still have to pay these no matter what is decided.

You will have to stand before a judge and give a detailed explanation of how your financial management failed.

If your case is dismissed, you cannot file again for bankruptcy for at least six months.

It won't remove mortgage hens on property so you will still be under obligation to pay those debts.

Depending on the circumstances, the court could decide to change the nature of your claim and extend the amount of time you will have to repay debt.

The Pros: The actual filing process can be done very quickly. Usually, you can complete a Chapter 7 in about three to six months.

Most states have exemptions that allow you enough room so that the majority of things you own will be exempt from bankruptcy. This means that you may be able to keep property that you own as long as it is used to meet your basic needs. You'll also get to keep any money that you earn or
property you acquire after the filing.

It may be possible to obtain new lines of credit after three years, but it will be at a much higher interest rate.

There are still some creditors who will lend to people with bankruptcy (but it will be at a cost).

You have two options for filing for bankruptcy. You can file again after six years if you have another setback. However, both will remain on your credit report for a maximum of ten years.

It can relieve you of much of your debt. But if you have family obligations, you will have to go to family court to get those obligations resolved, if possible.

It will stop persistent collector calls.

The six-year limit on a second file can be lifted if you have paid at least 70% of your debt before you attempt to file again.

There are many more pros and cons you could add to the list when considering bankruptcy. This type of recourse is very complicated and could cause all sorts of difficulties throughout the process and well into the future. To look at all your options, it is best to consult with an attorney before you proceed. Ideally, you want to find the best solution to your financial problems and bankruptcy may or may not be it.

Many myths can confuse someone when it comes to bankruptcy, so before we begin to talk in detail about them, let's address some of those myths.

It Clears All of Your Debt 

While filing can clear a great many financial burdens you may have, it does not clear all debt. There are several obligations that you will never be free from, and the only way to get rid of them is to pay them off or die, at which point, chances are your family members will have to pay them off.

Taxes: In most cases, the IRS is unforgiving and will require you to pay taxes on all un-filed claims no matter what your financial situation may be. There are a few exceptions where the debt may be forgiven.

  • If the tax return was filed more than two years previously 
  • The assessment is more than 240 days old 
  • It was a legitimate tax return 
  • You are not found guilty of tax evasion 
  • And the due date for filing was more than three years ago 

The IRS is very strict about their tax laws, and there is no guarantee that they will look favorably on your claim. It is only in rare cases where the IRS will forgive a tax debt.

Debts Not Included in Your Claim: Once you file bankruptcy, other debts may resurface. These cannot be included under your bankruptcy judgment after the fact.

Family Obligations: Payments for child support or alimony Will not be included in your bankruptcy claim. Even if you are behind on your payments, there is no way you can get out of these obligations.

Criminal Debt: Any debt you acquired for willful destruction of persons or property will also not be covered. If you have served time in prison for these types of crimes, you should consult a lawyer to determine if you are under obligation to pay criminal restitution to the injured parties.

Government Fines: These could be anything from overdue parking or jaywalking tickets to a DUI. Any type of government-issued fine will not be included in your bankruptcy case.

Government Loans: Federal financial aid or any other type of government loan is easy to get but not always easy to pay back. In many cases, these could be pretty substantial amounts, and they continue to accrue interest over the years. However, they are not eligible to be discharged by a bankruptcy court.

Personal Injury Debt Caused by Driving While Intoxicated: If you're thinking of relieving this type of debt, bankruptcy will not help you. Any injury or damage you cause while driving under the influence can never be expunged under bankruptcy law.

Debts Owed to Tax-Advantaged Retirement Plans: These could include any debt you have dedicated towards your future retirement and will also not find relief from in the final judgment.

Debts for Condominium or Coop Housing Fees: considering that housing expenses make up the bulk of most people's debts, these types of fees are not usually covered.

As you can see, there is a lot more to filing bankruptcy than you might have imagined. If you are seriously thinking about going this route, it pays to learn as much as you can about all the factors of bankruptcy so that you at least go into it with your eyes wide open.

Types of Bankruptcy 

There are several basic types of bankruptcy protection under federal law. Your personal financial situation Will determine which one is best suited for your personal needs. Chapter 7 is the most common and probably the easiest to file. Under Chapter 7, you can usually get your debt
discharged within 90 days from the date you file. There are definite advantages and disadvantages to those who choose it, so it pays to know exactly what it entails.

Chapter 7 Bankruptcy: 

Under Chapter 7 you will be able to discharge most of your unsecured debt. However, the trustee assigned to your case will attempt to sell any property that you own that is not exempted by the
courts to repay your creditors.

Still in most cases, debtors are allowed to keep the majority of their property if not all of it. In certain cases, where the filer has a substantial amount of property the courts will not be likely to show leniency and could actually require personal property to be sold to satisfy some of the debt owed.

Many with a high income will find they are not eligible to file for chapter 7.

If you are facing foreclosure, a Chapter 7 can temporarily stop the process allowing you time to bring your account current. However, if you cannot do this within a specified period of time, the foreclosure will eventually be resumed.

Those who are most successful in filing for Chapter 7 are most often those who have a lower income that falls below the median in their state.

The filing process is quite complex, and you will probably need assistance to get through all the paperwork. If you're already financially strapped, it may not be the most practical way to resolve your problems.

It is open to any individual that meets the necessary criteria as well as small businesses. However, if you own a business and are not interested in  closing, then Chapter 13 may prove to be at a better option.

Chapter 11 Bankruptcy: 

This bankruptcy option is usually referred to as reorganization and is more commonly used with businesses. It allows them time to regain control of their assets and put the business right again. The filing company will work in conjunction with the courts to negotiate a new payment plan that creditors can vote on. This is usually the best option for a small business that wants to remain in business. It may take as long as a year for a reasonable plan to be put together, but
through the courts, the claim could keep collectors at bay while you reorganize.

While Chapter 11 is available to businesses and individuals it is more commonly used by businesses, as it is not the most practical or b
eneficial option for an individual.

Chapter 13 Bankruptcy:

The second most common bankruptcy filing is Chapter 13, which is designed so that you can actually pay back all or at least a portion of the debt you owe. With the assistance of your court trustee, you
will develop a scheduled repayment plan.

The time set aside for repayment of the debt can range anywhere from three to five years. This decision will be based on your income level and other factors. However, it is possible that at the end of the term, there will still be some debt owed. At that point, if you have made regular payments and stayed faithful to the schedule the remaining balances can be discharged.

To qualify for Chapter 13, you must be able to prove that you have a regular monthly income from which to make payments from.

If you are facing a foreclosure, you can actually stop the process and use the time frame to bring your debt current. The amount of money that is past due is broken up into smaller payments and added to the regular monthly payment, making it easier to get caught up. However, if you fail to make all of these payments on time, as soon as the time period is up the bank is free to continue with the foreclosure. Therefore, it pays to decide whether or not this strategy will work for you or if it will only delay the inevitable.

There is no income requirement when filing Chapter 13, but there is a limit on how much unsecured and secured debt you owe to qualify.

You will have to submit a repayment plan that is approved by the courts to qualify for a Chapter 13 filing.

There are other forms of bankruptcy options, but these are the ones that are most common for individuals and small businesses.

The decision to file bankruptcy is not an easy one. It is not just a matter of deciding to go to court to get your credit erased. You not only have to decide whether it is worth the risk or not but also which process you want to take. Below is a list of factors you might want to think about to help you make a choice.

Who Files for Bankruptcy 

If your past due debt situation has become so serious that you are facing a court date, it might be best to file for bankruptcy. As soon as you file your papers, your debts go into an automatic holding period, forcing the creditors to back off.

Whether you choose to file Chapter 7 or 13, everything stops. Under Chapter 11 you get to keep a good portion of your assets and under Chapter 7 you could be relieved of all your debt so you can start all over again with a clean slate.

Who Should Not File for Bankruptcy 

If your debt has been co-signed by another person, it is not wise to file for bankruptcy. While you may be able to be relieved of your debt, it will only pass on to the co-signer. It would be better to work out an arrangement with your co-signer rather than put a damaging mark on their credit.

Alternative options could be to renegotiate a payment schedule With the creditor or seek a refinancing option, trying to get the loan at a lower interest rate.

Others who would not benefit from filing bankruptcy are those who are saddled down with government loans. Since these cannot be stopped because of bankruptcy, there wouldn't be much benefit in filing unless there are other debts that they may be seeking relief from.

No doubt many situations would require careful thought. Since every case is different, the decision to file or not to file lies entirely with you, the only person who knows all the aspects of your financial situation. Before you make a decision, it would be best to have a consultation with a bankruptcy attorney to weigh out your options. They will analyze your case and advise you on which direction would benefit you the most. The good news is that most will give you a free consultation on your first visit, a valuable asset that could save you a lot of anxiety later on.

Alternatives You Might Want to Try First 

No matter what your personal situation might be, filing for bankruptcy should be as a last resort. The very fact that the mark it leaves behind will stay with you for an entire decade should be enough for you to pause and take time to reflect on other options that could bring you similar relief without its lingering effects hanging over your head for many years.

No one would question how painful it is to be over your head in debt but some alternatives Will bring you the same relief but with less pain to go along with it. Below is a list of some other ways you can ease up on your debt situation, improve your credit score, and boost your reputation all at the same time.

Credit Counseling: Look for companies that offer free debt counseling to help you find alternative solutions to getting out of debt. These services are great for those who have a significant amount of credit card debt. They can help you to create a debt management plan with payments that are more reasonable than your present situation. There are a few benefits to be gained from working with a credit counselor too. You'll probably get a lower interest rate on your credit card, creditors are more likely to waive late fees, and are more willing to cease all collection activity as long as you maintain the credit schedule you've committed to.

Debt Settlement: If you are severely behind in your payments, you can try negotiating with your creditors and get the amount of debt you owe reduced. The initial advantage is a savings on your part. However, the long-term disadvantage is that it will be reflected on your credit report that you negotiated to pay less than you owe. This will initially bring down your credit score but remember, the longer the debt is on your report, the less weight it will have. So, if you don't mind waiting it out for a few years, you can get a real break just by renegotiating with your creditors.

A word of caution though, before you start negotiating to reduce substantial amounts of debt, you might want to discuss this option with a tax advisor. Chances are you would likely be responsible for paying taxes on the forgiven amount, as the IRS will view it as income or revenue of some kind.

Liquidating Your Assets: If you have any large ticket items like a car or jewelry, you can consider selling it off for some quick money. Many people have stocks bonds, precious metal, or other valuable assets they have set aside for a rainy day. You can be sure that it's raining outside if you're considering bankruptcy. You may not need to sell off all of your assets, but if you sell enough, you could get enough fast cash to settle at least some of your debt.

Take Out a Home Equity Loan: If you own a home, you might have enough equity in your home to pay off your debts and save your credit. Depending on how much you owe, this could be a fast and easy way to get out from under collector phone calls and letters from creditors demanding payment right away.

Debt Consolidation: If you still have some credit worthiness left, you could ask your bank for a debt consolidation loan. This has quite a few advantages. First, you get the convenience of making one payment every month instead of trying to keep track a lot of different ones, all due at different times. This option usually lowers the total amount you need to pay every month, making it much easier to meet your obligations than if you dealt with each creditor separately.

Change Your Habits: Probably the most common sense approach to managing debt is the change your habits. If you find that you're overextended financially, take steps to cut out some of your spending's. If you find that you're frequently paying late, set up a schedule to pay your debts earlier. Whatever you do, make sure that the new habits will be better than the old ones.

Wait it Out: While this may not seem like you're doing anything, the fact is that everything gets better with time. If you're so deep in debt that you can't pay your bills, and you have limited resources from which to collect there is little that a bill collector can do to get the money from you. If you don't have it, you just don't have it. Even if they sue you and receive a judgment in their favor, there is little recourse that they can legally take. Some creditors can repossess large items like cars, and they may foreclose on your home, but they can't take away your basic needs, no matter what the circumstances may be.

Those who can benefit from this step are considered by the courts to be "judgment proof," a designation that only a court can decide. If you think you might fall into this category, it would be best to discuss the matter With an attorney to make sure it applies to you.

Transfer Debt: Some credit card companies will offer lower rates to their newer customers. If you have credit cards that carry a lower interest rate, then the monthly payment will also be lower. Transferring your debt to those lower interest cards can make payments much easier to make and save you a lot of money at the same time.

Ask for Help From Family and Friends: It can be a humbling experience to go to those closest to you to ask for help, but it is a lot less humiliating when compared to standing before a judge and explaining why you got so deep in a hole that you had to declare bankruptcy. Before you approach them, figure out exactly how much you can afford to pay and ask them to help you by making up the difference. This will go a lot further than if you ask them to pick up the whole tab.

Use Your Savings: This should go without saying, but we're going to say it anyway. If you've been saving up for retirement, a special vacation, or some other plan that is far off in your future, consider borrowing from yourself. Take the money out of your savings plan and pay it back over time. As your own creditor, it is likely that you will be able to negotiate a reasonable plan with yourself that will be of benefit to both of you.

No doubt, you'll probably think of more options that can help you to avoid bankruptcy. You could try a combination of these listed or come up with a few more creative ideas. However, if all else fails and you're not able to get out from under your debt, bankruptcy is always waiting on the sidelines giving you an out if you need it.

Just keep in mind that there are no real quick fixes when it comes to getting rid of debt. There are pros and cons on both sides so make sure you analyze every option from every angle and make a decision that will work best for your personal situation.

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