Bankruptcy has a certain stigma attached to it in American culture. Some people see filing for bankruptcy as an admission of poor financial management or a non-descript moral failure. However, this is not the case. Reckless spending only accounts for aboutfive percentof bankruptcies filed. Combine that with the statistic that 62% of bankruptcies filed by individuals result from astronomical medical expenses, and the picture starts to become more evident.
Bankruptcy is not a sign of weakness, an admission of defeat, or a moral failing. In general, people have much less control over their finances than they’d probably like to believe.
Your Financial Wealth Rarely is the Result of “Willpower” Alone
Sorry self-help gurus — a person’s finances are intrinsically tied to their racial identity, gender identity, and social class. Racial identity and gender are assigned at birth, and social class is not as flexible as the American dream might have you believe. Sure, there is the occasional story of a person rising through social class barriers, but self-made millionaires are the exception and not the rule.
Market factors also affect one’s wealth beyond these immutable or nearly immutable restraints on an individual’s finances. These market factors are mainly out of an individual’s control. The point is that you can be doing everything right regarding your finances and still end up in miserable debt as a result of a car accident, illness, or natural disaster. Because of situations like this, state and federal law address bankruptcy in the law– to help people reorganize or eliminate insurmountable debt.
Guilt and Shame Surrounding Bankruptcy Prevents People From Knowing Much About It
Because bankruptcy is still taboo in the United States, many people don’t consider it an option until they have no other choice. Sadly, this is counterproductive, as specific bankruptcy chapters are more favorable to those with less debt and a steady income. However, people who forget the possibility of bankruptcy will miss that window and end up regretting it when they learn of the different chapters they could have filed for had they acted sooner.
You Have More Options Than You May Have Previously Thought
Suppose you have a growing amount of debt. In that case, the sooner you explore bankruptcy options, the more likely you will be able to avoid Chapter 7, which is the “liquidation” chapter and usually what people think of when they hear the word bankruptcy. Chapter 7 is drastic, but it is only one option people have when considering bankruptcy.
Let’s explore other options available.
Chapter 7: Liquidation Bankruptcy
“Liquidation” bankruptcy or Chapter 7, involves the liquidation of assets to repay creditors. There are no debt limits for this type of bankruptcy. However, there is a time restriction: you cannot file for Chapter 7 twice within eight years.
During the process, a court-appointed bankruptcy trustee decides which of your assets to liquidate to repay creditors. You have certain exemptions you can claim to avoid the seizure of your home or other necessary assets. Still, the amount of exemptions available to you is more limited in Chapter 7 than in other chapters. After the liquidation of all non-exempt assets, your remaining debt is discharged.
Bankruptcy stays on a credit report for ten years, which makes applying for a loan, mortgage, or other financial assistance more difficult.
Chapter 11: Reorganization Bankruptcy
“Reorganization” bankruptcy or Chapter 11, allows a debtor to reorganize their debts under a court-approved repayment plan. The creditor’s counsel, including creditors’ representatives and attorneys, represents creditors in Chapter 11 bankruptcy proceedings. The cost of this council is the debtor’s responsibility, which makes chapter 11 an expensive endeavor.
Because of the expenses, large corporations usually file Chapter 11. However, it is open to individuals. The court approves the repayment plan, which generally lasts between three to five years. After that, the debtor makes monthly payments for the duration of the reorganization plan. Unless you are wealthy, Chapter 11 is probably not the ideal chapter for you to file.
Chapter 13: The Wage Earner’s Plan
This chapter is only available to individuals, and is known as the “wage earner’s plan.” The repayment plan under Chapter 13 is three to five years. After a bankruptcy court approves it, filers make monthly payments to a bankruptcy trustee, who then repays creditors. It is common for 100% of a debtor’s disposable income to go toward these monthly payments. Because of this, filers need to prove they have a steady income.
This chapter is most favorable to debtors. You don’t have any direct communication with creditors and act through the court-appointed trustee. Plus, your debt is discharged as long as you make the monthly payments for the plan’s duration.
However, there is a debt limit on qualifying for Chapter 13, which is why it is so essential that people know about this option before their debt spirals out of control.According to Investopedia, “People are eligible to use Chapter 13 only if their debts are below certain limits: $419,275 for unsecured debt and $1,257,850 for secured debt.”
Secured Debt
Secured debt is backed by collateral. For example, a mortgage is a secured debt because the collateral is the home.
Unsecured Debt
Unsecured debt is not backed by collateral. Examples of unsecured debts are credit card debt, medical bill debts, or other types of bills.
Know Your Options Early
If your debts are growing at an unmanageable rate, you should consider discussing your options with a bankruptcy attorney. However, consultation is not a commitment! Bankruptcy attorneys can analyze your situation and provide impartial advice based on their experiences in bankruptcy courts.
Please do not allow the stigma of bankruptcy to prevent you from considering it until it is your last resort. The more debts you have, the less favorable the bankruptcy deal will be for you. Bankruptcy is not a death sentence. In fact, the number of annual bankruptcies is increasing overall.
More bankruptcies reflect poorly on our inequitable financial system and not on the people forced to endure bankruptcy proceedings. Yes, it is a challenging proposition to face, but the sooner you act, the less severe the ramifications are for your financial future.
About the Author
Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area. She writes for successfulPhiladelphia bankruptcy lawyerDavid M. Offen.
