If you're an individual or business owner who's found himself so deep in debt that you're considering bankruptcy, you need to stop and seriously consider the ramifications before you come to any conclusions. Bankruptcy is a choice which comes with consequences that many people regret later on. Despite what you may believe, bankruptcy is not simply a quick way to discharge your debts and start over with a clean slate.
Should you decide to file bankruptcy you'll find out almost immediately what we're talking about here. A federal judge will question you extensively about your financial situation, your need for bankruptcy, and whether or not you have looked at any alternatives. Only when a judge is thoroughly satisfied that bankruptcy is your only choice will your petition be allowed to proceed. The judge will also warn you of the potential consequences in order to make sure you know exactly what you're doing.
Why do people file for bankruptcy?
Far and away the most common reason individuals and businesses file for bankruptcy is that they can no longer stand the constant pressure that comes with not being able to meet financial obligations. For individuals, the phone calls at all hours of the day, the letters in the mail, and the threatening e-mails all take a mental and emotional toll. After a while an individual can become afraid to even answer the phone or open the door. This is no way to live, obviously. Bankruptcy offers them the opportunity to escape the unbearable pressure and get on with their lives.
Business owners and officers experience similar types of pressures. But they often have more creditors to deal with than the average individual. With more creditors come multiplied pressures which are even more emotionally and mentally taxing. Sometimes company officers believe it is just simpler to file for bankruptcy and be done with it.
What are the alternatives?
For individuals the two most common alternatives are debt consolidation services and help from friends and relatives. Paramount to both of these solutions is your willingness to cut off your credit supply. In other words, you're probably facing bankruptcy because you've overextended your credit. Cutting off your credit supply means destroying credit cards, canceling home equity lines of credit, and ridding yourself of any means to obtain credit in the near future. Not that you'll never use credit again, but you don't want credit available to you until your current situation is settled.
The debt consolidation option involves contacting a service that specializes in settling debts. This organization will work out payment plans with your creditors that could potentially save you thousands of dollars. Once payment plans have been worked out the agency will generally consolidate all of your debts into a single loan. As long as you're faithful to paying the monthly payment your creditors will be satisfied and they will leave you alone.
The second option of employing the help of friends and family ends up accomplishing the same thing as a credit consolidation service, except that you do all the work yourself. You contact your creditors, you work out payment plans, and you secure the financial help to make the plan work. This is the more dangerous of the two plans because it requires less accountability. And if you blow it, you undoubtedly will make enemies of those who have helped you.
For businesses other than sole proprietors, the only real alternative is to employ the commercial version of debt consolidation. It requires that you bring someone on staff that has the knowledge and skill to get control of your finances. Just like with individual debt consolidation, it will be the responsibility of the individual to work out payment plans with your creditors and make sure the company follows through.
What is the process for filing bankruptcy?
The filing process is not that difficult with the help of a skilled attorney. You and your attorney simply assess your situation, decide which chapter to best file under, put together your paperwork, and submit your petition to the court. The most important part of this process is assembling your paperwork in accordance with federal law. Since bankruptcy law can be somewhat complicated times, you and your attorney need to be sure all of your paperwork is in order.
While the law doesn't require that you use the services of an attorney, it is highly recommended that you do. An attorney with a number of years experience in bankruptcy court will know how best to submit your paperwork. He will also know whether or not you should file for Chapter 7 liquidation or chapter 11/Chapter 13 reorganization. A skilled attorney makes the filing process that much easier because he knows what the law says.
How will a bankruptcy affect my future?
The biggest myth surrounding bankruptcy is that it's an easy way to discharge debts and start over from scratch. Unfortunately, nothing could be further from the truth. In addition you also need to know:
- not all of your debts are dischargeable
- you must have adequate disposable income in order to avoid liquidation
- any debts you incur after filing a petition will not be covered
- once your bankruptcy is discharged, real estate loans can still be foreclosed upon if they are not kept current
- alimony and child support payments must still be made on time
If you should decide to file for bankruptcy it is important you understand that this is something that will be on your record for a minimum of seven years. In some cases a bankruptcy can even stay with you for 10 years. During this time it will be nearly impossible for you to obtain any credit for a new car, a home, etc. Any credit you are able to obtain will come with extremely high interest rates that will make it not worth your trouble.
If you have children you plan to send to college a bankruptcy might hinder their ability to obtain financing. Most people do not understand that student loans rely heavily on the ability of parents to make payments on behalf of their children. They also take into account the parents' financial situation in assessing the genuine need of a student. Like or not, a bankruptcy demonstrates your inability to manage financial resources and could possibly jeopardize your student's chances of receiving financial aid.
For businesses that decide to file for bankruptcy they have the added problem of borrowing money in the future. Their credit rating will automatically be downgraded at least for several years, which will hinder their ability to borrow. Along with that comes a higher cost of borrowing which must then be passed on to the businesses' customers in the form of higher prices. If prices go too high, customers could be lost and further damage result.
At the end of the day, bankruptcy is not the golden egg many people perceive it to be. If you decide to go this route you will potentially enjoy the relief from creditors it provides, but you will also suffer consequences well into the future. Be sure to consider very carefully whether or not this is the only option available to you.