Question: At what point does it make sense to declare bankruptcy?
Dear Reader,
The general consensus is to declare bankruptcy as a last resort, only after you’ve exhausted all other debt relief options. Yet, sometimes it is hard to know when you’ve run out of options.
Your options boil down to your overall financial situation, including your income, debts, and assets. To get a better idea where you stand, start by assessing your situation with a determination of your net worth and how much you owe. To calculate your net worth, add up all of your liquid assets, any retirement funds, real estate, and any investments that you may have. Next, tally your overall debt by adding up how much you owe for each credit card and loan. After you have the totals for each category, compare them. If you owe more than what you own and your income is not enough to meet your financial obligations, bankruptcy may be a solution.
Yet, it may not be your only one. You may be able to repay much of what you owe through a debt management plan, debt consolidation, or even settling your accounts for less than the full balance. And if you have a home, you may have options to modify your mortgage and keep your property in the long run. If you are unsure of your options, reach out to a NFCC certified credit counselor for guidance. A credit counselor can review your situation in depth and help you figure out the pros and cons of your options, including bankruptcy.
If you decide to move forward with bankruptcy, work with an attorney to guide you through the legal process. For personal bankruptcy, you could either file Chapter 7 or Chapter 13. Chapter 7 works best for people with overwhelming credit card and few assets. In this case, your assets are sold to pay off the creditors. If you have a home or other property that you want to keep, Chapter 13 may be a better option. Chapter 13 bankruptcy allows you to pay off your creditors through a payment plan in three to five years without losing your assets. But if you miss your court-arranged payments, you may lose the assets you are trying to protect.
When it comes to repaying your debts there isn’t a one-size-fits-all type of solution. Bankruptcy may seem very scary and can severely damage your credit, but in certain circumstances, it is the right choice to clear your debt and rebuild your finances. With time, the negative consequences of bankruptcy fade away, and you will be able to rebuild your credit. You don’t have to make this decision alone, talk to a professional and evaluate your options. Good luck!