When hearing the word bankruptcy, the first thing that crosses our mind is that it represents failure and shame. However, for many people worldwide, bankruptcy is the path that can lead them out of a financial crisis. In conclusion, it isn’t for failures but for the people who realize and accept that they must start over to succeed.
There are a lot of things that can lead one into bankruptcy. Unexpected crises such as medical emergencies, loss of employment, or a hefty loss in business can all cause irreversible damage to a person’s finances. Moreover, the average American is burdened by so many debts and expenses that it can be challenging to sustain themselves financially.
Speaking in terms of numbers, the average credit card debt for an American is around $15,800, student loans can amount to $24,000 on average, and mortgage debt can be a liability of at least $100,000. The burden of repaying these, coupled with other expenses such as insurance premiums, vehicle loan payments, and the basic costs of living, can cripple people if they are hit by a crisis that substantially impacts either their income or expenses.
Bankruptcy is considered, by many, to be somewhat of an extreme measure. However, by looking into the specifics, dynamics, and workings of bankruptcy, any individual can determine if it will be a good decision to declare bankruptcy for their financial future.
Who is Bankruptcy For?
As said before, bankruptcy is a drastic decision. However, it can be a positive option for people who cannot pay their debts despite minimizing their expenses. But there are some things that you need to try before considering filing for bankruptcy. Your first efforts should be put towards renegotiating your debt. This can be done through credit counseling or a debt reduction program. Renegotiating might damage your credit score, but filing bankruptcy means not being able to take out any kind of loan for several years.
You should try to get the best results from a renegotiating attempt if you plan to take out a loan later. If you still must choose bankruptcy, you should adapt to living with your current income and avoid making decisions that could land you in a financial crisis after becoming eligible for loans again.
What is Bankruptcy?
In simple terms, bankruptcy is like flicking the switch of your debt history off and then back on. It resets your consumer debts, such as those associated with your credit card, vehicle, mortgage, etc.
Filing for bankruptcy means cutting off the relations with your creditors so that they will not pursue you for payments, and you won’t be able to get new debts from them (at least for some time).
It is a misconception that bankruptcy ruins your reputation. It might hurt your chances of getting loans and credit, but that is all. It is a personal decision that enables you to restructure and renew your financial situation for the sake of yourself and your family.
Bankruptcy Does Not Mean Losing Everything
It is widely (and wrongly) believed that bankruptcy leads to the loss of all assets. However, contrary to this, bankruptcy laws within the bankruptcy court protect many assets you own. The assets include furnishings, retirement savings accounts, primary homes, and vehicles (inexpensive ones). The specifics vary from state to state and at the federal level, so you should check the laws in your state or area to better understand what is protected.
On the federal level, retirement accounts are protected to a limit of $1,171,650. Other protected things include your 401(k) account, pension, disability, IRA, and Social Security benefits. Many lawyers recommend against borrowing from a protected account to repay debt.
Benefits and Costs of Bankruptcy
It would help if you compared many things to be sure that a declaration of bankruptcy is feasible.
First, you should know that, on average, filing bankruptcy costs $2,500. To be feasible, the debt relief you get by filing bankruptcy should amount to more than $2,500.
Second, if student loans are your primary debt, then bankruptcy will not have much effect because it isn’t possible to dismiss student debt in bankruptcy. The possibility of student loans being discharged is only present in a limited number of circumstances.
If your primary debts are unsecured, such as credit card debt, medical debt, etc., it might be easier to remove them via bankruptcy.
Conclusion
Bankruptcy can be emotionally difficult because it might damage your financial portfolio, hindering your ability to get loans in the future easily. However, it can be a tool for many to break free from loans that might limit and even threaten their family’s financial future. If used wisely and strategically, it can help you start over and avoid any kind of mistakes you made in the first place.
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