In a parallel universe, every person on earth will be satisfied and content with the life they have because they aren’t struggling to make ends meet. They will be free to do what they want without the fear of financial repercussions because they can afford everything their heart desires.
But sadly, this is not a parallel universe. Many people are in monstrous debt because of several factors, which can include the lack of financial literacy and holistic education, their preexisting marginalized living conditions, or an unforeseeable event such as a medical emergency.
No matter the reason you have for accumulating so much debt, it goes without saying that you will be held accountable for your actions. That’s because nothing in this world is free. If you took out a loan to pay for your purchase, then you will be expected to return the borrowed amount within the agreed-upon time.
So, if you failed to hold up your end of the bargain, your lender can seize the property you put down as collateral to pay back the money that they lost. Overwhelming debt can be difficult to get out from, but there is a way to solve that problem — filing for bankruptcy.
What is Bankruptcy?
In a nutshell, people can file for bankruptcy when they can no longer afford to repay their debt. This is a legal process that can help individuals with a large debt seek relief so that they won’t be harassed by their debt collectors as well as stop foreclosures, repossessions, wage garnishments, and tax lien enforcement.
With this in mind, filing for bankruptcy can be the best solution to your financial problem because it can offer you a way out of your debt. Sometimes, it can also be the only solution you’re left with because your creditors aren’t willing to renegotiate your repayment plan and you have more debt than your assets and annual income combined.
However, this relief from debt can come with plenty of negative consequences, such as getting a major hit on your credit score, losing your properties and assets, or taking a toll on your mental health. That’s why it’s very important to weigh your pros and cons before deciding to file for bankruptcy.
What Types of Bankruptcy Can You File?
If you decide to file for bankruptcy, it will be better to do so under the guidance of a professional who’s well-versed in the complexities of this legal process. Having a bankruptcy lawyer by your side during the process can help you make informed decisions; they can also strategize your next steps after declaring bankruptcy.
There are two common types of bankruptcy for individuals, namely Chapter 7 and Chapter 13. Before you decide to file for bankruptcy, you must first know the advantages and disadvantages of both types so you can gauge what is most beneficial to your situation. Here’s a quick overview of both types:
The Chapter 7 bankruptcy is also known as liquidation bankruptcy because the federal court will assign a trustee that will sell some of your properties and use the money earned to partially pay off your creditors. For this type, you can protect your personal assets such as your car, pensions, and equity.
On the other hand, Chapter 13 bankruptcy is called reorganization bankruptcy because it can allow you to eliminate your debt under a three- to five-year repayment plan. Through this option, you will only need to make payments to your court trustee based on what you can afford, and these payments will be distributed among your creditors.
What Happens After Declaring Bankruptcy?
As previously mentioned, filing for bankruptcy will come with serious repercussions on your future borrowing eligibility. This is because the bankruptcy will stay on your credit history for seven to ten years, which means that you will be less likely to be approved for borrowing through conventional lending institutions.
However, this doesn’t mean that you’re completely banned from borrowing money in the future altogether. It may be more difficult to get approved on your loan or credit card application, but you can still work on improving your credit score by meeting all your monthly dues on time.
Filing for bankruptcy can offer you a fresh start if you’ve amassed overwhelming debt and can no longer afford to repay it through your own means. But with that clean slate can come an abundance of repercussions on your financial eligibility that you should be prepared to face.
That’s why filing for bankruptcy is not something that you can decide on a whim. Instead, you must take the time to weigh all your options so that you can make the right, informed decision. And once you get approved, your next step should be to focus on rebuilding your credit score.