On TV, I heard about Personal Bankruptcy. But what is Bankruptcy anyway?
Bankruptcy is a legal process that helps people sort their finances, when they cannot pay off their debts – due to excessive borrowing, a major financial setback like job loss, etc.
How does the bankruptcy process work?
Personal bankruptcy can be filed under either chapter 7 or chapter 13 of the U.S. bankruptcy code.
When someone declares bankruptcy under chapter 7, the assets they own are valued and sold to pay off their debts. Any debts that cannot be paid off are forgiven – with the exception of certain types of debt like student loans.
Under chapter 13 bankruptcy, people keep their assets but work out better repayment terms with creditors to pay off their debts. However, their debts are not forgiven.
This sounds too tempting. If I can’t pay back my debt, I can just file for bankruptcy? Is there no downside?
Bankruptcy is considered a very bad sign on your credit report – and results in higher interest rates for future loans. In fact, you may not even be able to get a loan or a credit card if you have filed for bankruptcy in the recent past!
Bankruptcy can stay on your credit report for up to 10 years – so it is a decision that can have long-lasting consequences on your finances, and should not be taken lightly.
Does bankruptcy have any benefits?
The main benefit of filing for bankruptcy is that you get a financial reset. You can start building your financial credibility from scratch by overcoming debt and regaining financial freedom.
It also gives you peace of mind, since you don’t have to deal with collection calls and harassment from creditors anymore!
How can I prevent bankruptcy?
You can check with your lenders if they can renegotiate terms so it is easier for you to pay off the debt. Doing so is also a good deal for them – they’d rather have you pay back the loan slowly than not pay back at all!
How can I file for bankruptcy?
Filing for bankruptcy is a complex legal process, involving eligibility checks, filling out numerous forms, filing a petition in court, and much more. It is best done with the help of a lawyer.