If you’re like most Americans, you’ve probably heard a great deal about the bankruptcy process. Bankruptcy is actually a complex legal framework that permits consumers and businesses to refinance their debt obligations or liquidate their assets in an orderly fashion.
Every year, many thousands of American consumers are forced to declare bankruptcy. Many small and large businesses are drawn into insolvency as well. Although this process has some benefits, it also has many drawbacks. First, it might be helpful to review the two basic types of consumer bankruptcy.
“Chapter 13” bankruptcy is also known as “reorganization.” When you file for reorganization, you’ll be required to present a realistic repayment plan to your creditors. In most cases, this process will be arbitrated by a licensed bankruptcy judge. He or she will ensure that you reach an amicable agreement with your creditors in a short period of time.
Unless you specifically “reaffirm” your mortgage, auto loan and other secured debts, you’re likely to lose the underlying assets during reorganization. For instance, your mortgage lender will almost certainly initiate foreclosure proceedings on your home. Your auto lender may repossess your car as well. If you demonstrate that you’re willing and able to repay these obligations, you may be able to keep the secured assets. However, your lender will retain complete control over the process.
Even if you’re able to keep your home during the reorganization process, you’ll be forced to use most of your liquid assets to pay off your current creditors. What’s more, your bankruptcy declaration will dramatically affect your credit score. After your reorganization process has ended, your credit score may have dropped by 200 points or more.
Under these circumstances, the fact that you may be able to keep your home and car during reorganization will be cold comfort. With a depressed credit score, you’ll be unable to procure new credit cards or personal loans. If you need cash badly, you may be forced to use a payday lending agency that charges exorbitant interest rates on its short-term loans.
Unlike reorganization, “Chapter 7” bankruptcy involves the partial liquidation of a bankrupt individual’s assets. This is a serious step that should only be taken in dire circumstances. In fact, it’s even frowned upon by proponents of reorganization. When you declare Chapter 7 bankruptcy, you’ll quickly wipe away your unsecured debts. Depending upon the laws in your state, you’ll be permitted to keep a small cache of personal items to ensure your comfort and well-being. However, your life will undergo drastic changes that may last for years to come. These are liable to be even more serious than the aftereffects of the bankruptcy reorganization process.
Fortunately, there are several viable alternatives to either kind of bankruptcy. For starters, many debt-ridden borrowers who face the prospect of bankruptcy choose to make tremendous sacrifices in the name of continued solvency. Depending upon the amount of slack in your budget, you might be able to rework your household’s finances without enrolling in a program of debt relief or borrowing money from a disreputable payday lender.
This will require discipline and perseverance. If you’re serious about reworking your household’s budget, start by cutting out discretionary expenses like impulse purchases of big-ticket consumer goods and expensive restaurant meals. Instead of eating three meals per week at fine-dining establishments, resolve to treat your family to one night out per month. Likewise, slim down your cable package so that you’re only receiving the channels that you actually watch.
Next, reduce your home’s overhead expenses by making it more efficient. This is easy to do: Make sure that you turn off unnecessary lights and appliances, minimize your climate-control system’s workload, and refrain from taking long showers or running excessive loads of laundry. Over time, these little steps will add up to produce big savings.
There are also several methods of managed debt relief at your disposal. These include credit counseling, debt consolidation loans and debt settlement. You can find more information about these forms of debt relief elsewhere on our site.
