What is Bankruptcy?
Bankruptcy is a court proceeding in which a judge and court trustee examine the assets and liabilities of individuals and businesses that can’t pay their bills and decide whether to discharge those debts so they are no longer legally required to pay them. Bankruptcy laws were written to give people whose finances collapsed a chance to start over. Whether it was bad decision-making or bad luck, lawmakers could see that in a capitalistic economy, consumers and businesses who failed need a second chance. And nearly all of them get it.
Who Declares Bankruptcy
The individuals and business who file for bankruptcy have far more debts than money to cover them and don’t see that changing anytime soon. What is surprising is that people – not businesses, are the ones most often seeking help. They have taken on financial obligations like a mortgage, auto loan or student loan or perhaps all three, and don’t have the income to pay for it.
It is important to understand that while bankruptcy is a chance to start over, it definitely affects your credit and future ability to use money. It may prevent or delay foreclosure on a home and repossession of a car and it can also stop wage garnishment and other legal actions creditors use to collect debts, but in the end, there is a price to pay.
When Should I Declare Bankruptcy?
There is no perfect time, but there is a good rule of thumb to keep in mind when you’re asking yourself the question: should I file for bankruptcy? If it is going to take more than five years for you to pay off all your debts, it might be time to declare bankruptcy.
The thinking behind this is that the bankruptcy code was set up to give people a second chance, not to punish them. If some combination of mortgage debt, credit card debt, medical bills and student loans has devastated you financially and you don’t see that picture changing, bankruptcy might be the best answer. If you don’t qualify for bankruptcy, there is still hope.
Other possible debt-relief choices include a debt management program or debt settlement, but both of those typically need 3-5 years to reach a resolution and neither one guarantees all your debts will be settled when you finish. Bankruptcy carries some significant long-term penalties because it will remain on your credit report for 7-10 years, but there is a great mental and emotional lift when you’re given a fresh start and all your debts are eliminated.
Why Would You Declare Bankruptcy?
The primary reason for declaring bankruptcy is to start all over again with a clean slate.
However, there is a secondary reason for filing that might ease some of the tension related to your problems. Declaring bankruptcy will stop the badgering phone calls, letters and other attempts to contact and collect from you.
Legally, it’s referred to as the automatic stay. It means that creditors are prohibited from filing a lawsuit against you or entering liens against your property or constantly contacting you in an effort to get a payment on the debt. It also stops things like eviction, utility disconnection and wage garnishments.
Bankruptcy is a long tormenting situation. Once you have filed, the process usually takes six months or more to complete. Before, and during that time, you and possibly your friends or workplace, have received phone calls from debt collection agencies trying to settle your accounts. Those calls must stop as soon as you declare bankruptcy.
