With the economy as bad as the last year has been, there has been a sharp increase in the number of personal bankruptcies filed. By some estimates, the increase is as high 34%, and the estimated total number of bankruptcies for 2009 will be 1.4 million new cases. Most of the new filings are Chapter 13, which seems to show that people are using bankruptcy to hold onto their homes and other assets through this turmoil, while paying back a portion through repayment plans.
What is Bankruptcy?
Bankruptcy is a method for a debtor to be granted court-ordered relief from his debts. Bankruptcy can be valuable and very necessary in some cases. However, every person who has financial struggles should not declare bankruptcy.
Should I Declare Bankruptcy?
There is not a way to give anyone a quick yes or no answer to the question of whether or not you should declare bankruptcy. Discussing your personal situation with a credit counselor is the best way to get an unbiased opinion and evaluate the costs and benefits that bankruptcy might afford you.
Types of bankruptcy
In personal bankruptcies, there are basically two types.
- Chapter 7: In a chapter 7 bankruptcy, your assets are liquidated, with some exceptions for your home and personal automobiles, etc. But anything above the limits will be sold to the highest bidder and used towards the debt that you have incurred.
Not everyone will qualify for Chapter 7 bankruptcy, as a means test is applied to see if you have the ability to repay a portion of your debt. If that is the case, you will likely only be permitted to declare bankruptcy via Chapter 13.
- Chapter 13: Previously called the wage-earner’s plan since it takes a portion of each of your paychecks to pay down your debt. In a Chapter 13, the Trustee sets up a repayment plan for you based on the amount that you can afford to pay out of your personal earnings. This can amount to anywhere from 10% to 100% of what you actually owe your creditors. Even if you only pay back 10%, once you successfully do that, the bankruptcy is declared paid in full, and your creditors cannot attempt to collect the balance from you.
Are there alternatives?
Just like anything else, there is always another choice that can be made. In any case, determining what’s appropriate for your personal situation is best left to the experts. So, again, the first step is speaking with a credit counselor. Potential alternatives they might suggest include:
- Financial Management: Giving up control of your cash is difficult, but a financial manager can pay your bills and give you an allowance until you are straightened out. If your problems are the result of “What did I do with all my money?” syndrome, this can be very helpful.
If you have a counselor create a budget for you, you can retain control of the money, which might also be helpful. Choose counselors wisely, and consider using non-profit services.
- Work out Plans: Most creditors today will work with debtors to create some sort of repayment plan that is a win-win situation. Creditors realize that debt collections are quite difficult in these economic times, and it is best to get what they can. Litigation is expensive and pushing debtors into bankruptcy may result in a smaller or nonexistent recovery.
- Refinancing: Check with your banker and find out if it’s feasible to refinance your home and pay off any existing higher interest debt. (This is not as easy as it once was, due to the deflated home values in the last year or so.)
To obtain truly unbiased advice about your financial situation, consult first with a non-profit counselor which you can find with the help of your government. Each keeps a list of non-profit agencies that will help you work through your financials and decide on the appropriate course of action, without regard to any material gains for themselves. Don’t declare bankruptcy if it isn’t necessary.
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