What is Bankruptcy and How Managing Your Debt Properly Can Help You Avoid It
Brooke is a freelancer who focuses on the financial wellness and technology sectors. She has a passion for all things wellness and spends her days cooking up healthy recipes, running, and snuggling up with a good book and her fur babies.Read full bio
At a Glance
The cloud of financial debt and distress is heavy over American society. So many people are neck-deep in debt without a logical way of exiting the debt. No one wants to be neck-deep in debt, but life happens.
Nevertheless, there are numerous ways for you to get out of debt. There are multiple governmental schemes for exiting debt, and with a little research, you’ll find one that’s suitable. Beyond knowing the options that are available, it’s in your best interest to also know the pros and cons of each option. This way, you can opt for the most suitable option.
Reading this article till the end will help you understand certain points. Some of these points are:
What is Bankruptcy
Bankruptcy is a legal creation that offers an easy way to get out of debt. If you’re stuck in credit card debt, personal loans, or most types of unsecured loans, then you might want to consider filing for a bankruptcy discharge.
Before getting a discharge on your debt, the bankruptcy court will first evaluate your income and expenses to know whether you can make the payment or not. For Chapter 7, the court will check if you can still afford to pay.
Types of Bankruptcy
Before you file for a bankruptcy discharge, it’s best to first understand the types of bankruptcy that are available. Doing this helps you apply for the best bankruptcy available.
The most common types of bankruptcy are Chapter 7 bankruptcy, Chapter 11 bankruptcy, and Chapter 13 bankruptcy. But it doesn’t end there as there are also Chapter 9 bankruptcy and Chapter 15 bankruptcy. There’s another one that’s called Chapter 12 bankruptcy which is exclusively for large-scale farmers.
I’m pretty certain that you’re going to be applying for Chapter 7 bankruptcy or Chapter 13 bankruptcy. This is because they’re the most common of all bankruptcy types. To help you understand the two most prominent bankruptcy types, we’ll help you highlight what Chapter 7 and 13 bankruptcy entail:
Chapter 7 Bankruptcy
- Getting this type of bankruptcy is very fast. Debtors sometimes get a discharge in less than 90 days.
- It is relatively cheaper than Chapter 13 bankruptcy
- You may lose your assets
- To qualify, you need to qualify according to your income level, location, and size of your dependent under the income limit for Chapter 7.
- The credit bureau will put the details of your loan on your credit report for 10 years
Chapter 13 Bankruptcy
- Chapter 13 bankruptcy process takes a much longer process
- The cost is somewhat significant. Many question whether Chapter 13 is worth it.
- Assets may be safe
- There’s an expected monthly payment obligation
- Most people can qualify as long as you are under the debt limit.
- Creditors can see information on your Credit report for 7 years
Before a bankruptcy court issues a discharge, it’ll first estimate whether you fulfill the requirements of the law to get a bankruptcy discharge or not.
Before you get a discharge, you’ll first consult with a bankruptcy attorney, attend meetings, and take two online courses.
How much would it cost to file for a bankruptcy discharge?
The cost of applying for a bankruptcy discharge might chase would-be applicants away. This is because they’re already in debt, and won’t have so much money to spare for the required payments. However, there’s no reason to fret as the attorney consultation fee can be paid in installments. Two main payments to be made include the attorney fee and the filing fee. While we can’t estimate the attorney fee because the cost varies significantly, the filing fee on the other hand cost between 300 to 400 dollars.
How to Manage Debt to Avoid Bankruptcy
Debt consolidation is probably one of the most common alternatives to bankruptcy. That said, a debt consolidation loan may be out of reach if you have a low credit score or a high DTI ratio.
Related: Debt Consolidation or Bankruptcy: Which Is Better?
There are numerous bankruptcy alternatives to filing for a bankruptcy discharge. There are many alternatives that we can’t extensively talk about them all in this article. However, we’ll touch on the very prominent and effective ones. But before diving into that, we’ll like to discuss the free tool that helps people identify their prospect of getting a bankruptcy discharge and other much preferable options that they should consider.
As said earlier, there are many options to filing for a bankruptcy discharge. To know whether an alternative is right for you, it’s best if you first consider the pros and cons of each option. Doing this will help you make the best decision. Let’s start discussing what those bankruptcy alternatives are:
Negotiating with your creditors
If just like me, you’d rather opt for the option that impacts your credit score on the list, then here’s one option to consider. However, if your creditor is one that doesn’t accept negotiation after issuing a loan, then you have no choice then to opt for another option.
A debt settlement company is one that negotiates for a lesser debt sum than you owe. Basically, they ask the company to let you pay way below your actual debt sum.
As enticing as this option is, it has its pros and cons that should be extensively considered.
Debt Payoff Planning
Debt payoff planning is the arrangement of your debt according to the principles of debt avalanche, debt snowball, and debt savvy payoff method. To use this method, it’s best to have a budget.
Related: Is It Better to Pay Off Debt or Declare Bankruptcy?
What should you do?
Although I can’t give precise advice since I don’t know the peculiarity of your debt problem. However, irrespective of your situation, you can find helpful resources on how to get out of debt without bankruptcy.