When you are struggling financially with little means to meet your obligations, the consequences can be terrifying. Your credit score can take a hit and you may be at risk of losing possessions such as your home and vehicle.
At times like this, it may be easy to make the decision to file for bankruptcy which means that your debtors will not be able to collect any more money from you, but you may be required to liquidate some assets. Before settling on bankruptcy as a solution, below are factors to consider regarding whether this process is right for you.
1. Nature of debts
When you file for bankruptcy, you will not be required to pay unsecured debts such as credit cards, loans, lines of credit, unpaid bills, and tax debts. However, it does not address secured loans such as ones for vehicles and houses.
Before making the decision to file for bankruptcy, take an inventory of the type of debts that you currently owe. This will give you a great indication of whether it will benefit you. For instance, if you have a lot of unsecured as well as secured debt, filing for bankruptcy will eliminate the debt on the unsecured accounts, allowing you increase your cash flow to be able to afford your car and home.
2. Credit score
Before filing for bankruptcy, you need to be mindful of the fact that it does go on your credit history. While this is enough to make most people apprehensive about following through with the process, it may not be as scary as it seems in your case.
A bankruptcy typically stays on your credit history for about 10 years. While this will make it extremely difficult for you to obtain financial assistance at a favourable interest rate, sustaining good credit after filing does not deter debtors as much because the older a bankruptcy is, the easier it is to mitigate. If you have historically had credit problems, the truth is bankruptcy may not make that much of a difference and you could start to repair your credit score in as little as one year after filing.
Bankruptcy is typically a last resort option. A decision to file is usually made when the finances of an individual or business can no longer be managed in a way that allows for obligations to be fulfilled. Because the seriousness of the process, all alternatives should be explored first.
One popular alternative to bankruptcy is consumer proposals. This consists of hiring a trustee to contact all of your debtors and propose to pay a portion of what you owe. When the proposal is agreed to by the debtor, you will pay the amount, the account is closed, and no recourse can be taken against you. Another option, usually considered if a person is still financially stable but bankruptcy is inevitable, is credit counselling. This consists of attending appointments with a counsellor and learning how to better manage finances as well as compose a plan to pay back all debts outstanding.
4. Types of bankruptcy
It may have been an easy decision for you to file for bankruptcy, but you need to know which type to file under. Failing to do so will only mean more financial issues for you.
Personal bankruptcy consists of two types. Chapter 7 bankruptcy is more appropriate for those with insurmountable debt and no way to pay it back. In this type, you are able to walk away from all debts. Chapter 13 bankruptcy consists of composing a plan to repay all or part of the debts typically within 5 years. Being mindful of the bankruptcy types is extremely important because for instance if you file under chapter 13 but have no way at all to repay the debt, you will only experience more difficulties down the road.