When Bankruptcy is the Only Option

Bankruptcy is often viewed as a moral failing. The image of the bankrupt individual is that of a scofflaw who racks up enormous debt, then shirks his financial responsibilities by filing bankruptcy. But that image is far from accurate.

After the near total financial collapse of 2008, a lot of people who thought they were financially stable, suddenly found themselves living beyond their means. The culprits were job losses, pay cuts, and rising rates on loans as banks scrambled to recoup their losses.

But even before 2008, an otherwise responsible individual could find himself in a serious financial bind if he was suddenly faced with an insurmountable expense – like medical bills. In fact, medical expenses were the cause of 62% of bankruptcies filed in 2007.

All it takes is one major mishap for someone to find himself buried deep in debt. And for many, the only way to ever see daylight is to file bankruptcy.

There are two types of bankruptcy available to individuals: Chapter 7 and Chapter 13.

Chapter 7 is a debt forgiveness plan where all eligible debts are eradicated. Eligible debts include installment loans, cash advances, credit cards, mortgages, personal loans, medical bills, and utility bills.

The advantages of Chapter 7 bankruptcy are that it’s relatively cheap to file, and you get a fresh start.
The disadvantage is that you could lose some of your property. If you have a home loan, the bank will take the home as part of the settlement. The same goes for an auto loan, and you will need to surrender all of your credit cards.

Also, Chapter 7 is only an option for people who have absolutely no money. An individual who has no income, or very little income, no property, and no savings, would qualify for Chapter 7. And individual who has higher income, money in savings, or equity in property, would not.

Individuals who do meet the financial qualifications for Chapter 7, can file Chapter 13.

Chapter 13 is a debt adjustment program where the courts negotiate with your creditors to create a monthly payment plan.

The major advantage to Chapter 13 is that, in most cases, you can keep your property. Also, some debts could be written off in the course of the negotiation. The major disadvantage is the cost. Chapter 13 is more expensive than Chapter 7 because your lawyer and the courts have to administer the repayment plan throughout the term of the plan, and they charge fees.

Another disadvantage is that your repayment plan is based on your income and assets at the time that you file. If your financial situation changes for the worst, you could be stuck with a payment plan that you can’t afford.

You are also required to notify the courts when your financial situation changes for the better, so the courts can adjust your plan and take larger payments.

You can file Chapter 7 or Chapter 13 on your own, but that is not advisable. The bankruptcy process is difficult and one missed form could result in the courts dismissing your filing. Your best bet for a successful filing is to use a bankruptcy lawyer. You can find a lawyer through your local legal aid society, or bar association. You can also find one online by searching for the type of bankruptcy and your city or state — for example, “chapter 13 bankruptcy Michigan.”

The bankruptcy systems exists specifically to give consumers relief from insurmountable debt.  If you have struggling to pay off debts, with no end in sight, bankruptcy could be your best option.