Many factors can contribute to a financial setback that drives people to bankruptcy. Loss of income, high medical expenses, escalating mortgage payments and overspending can all lead to unmanageable debt.
Filing for bankruptcy discharges most, if not all, unsecured debt. It also protects property that’s exempt from creditors, such as a home, car and items necessary to live.
- Debt relief
There are a variety of debt relief options that you can consider before filing for bankruptcy. These include debt management plans, debt settlement and credit counseling. If you have the patience and time to address your debt in this way, they can provide you with a path to becoming debt-free without harming your credit score.
However, debt relief may not be an option if you’re at risk of foreclosure or repossession. In addition, some types of debt are not eliminated by filing bankruptcy, including secured debt (like mortgages or auto loans) and federal tax liens.
Bankruptcy can eliminate unsecured debt, such as credit card balances and medical bills, while halting utility shut-offs, wage garnishments and other collection actions. The moment you file, a provision of the law called the automatic stay prevents creditors from taking action against you until your bankruptcy is discharged or you complete your repayment plan. This is a huge benefit of the process.
- A fresh start
For business owners, bankruptcy offers a way to restructure debt, potentially save the company and move on. However, declaring bankruptcy can damage a credit score and will show on a report for seven to 10 years. This can make it difficult for businesses to get loans in the future unless they can demonstrate strong cash flow.
A fresh start can be a powerful motivation to change one’s behavior and create a more positive financial outlook. Behavioral economics research has found that people can use temporal landmarks to create new mental accounts and focus on goal pursuit and self-improvement.
Bankruptcy can offer a fresh start by discharging many types of debts, eliminating collection calls and creating a debt payment plan. It is important to note that filing for bankruptcy can be a long and expensive process. Before filing, it is critical to determine if there are other options that could work for your situation. This may include negotiating with creditors, increasing income, selling assets or reducing expenses.
- Time to reorganize
A major reason many people file bankruptcy is to buy time to reorganize their
finances. If your credit card debt is spiraling out of control due to high interest rates or you have taken on additional loans to pay other debts, bankruptcy may be a way to get back on track.
The Chapter 13 bankruptcy process gives you three to five years to repay your debts through a repayment plan. During this period, your creditors are generally prohibited from taking any action against you. It’s important to note that filing for any type of bankruptcy can damage your credit and make it difficult to obtain new lines of credit or secure mortgages or loans.
The bankruptcy process requires the debtor in possession and a committee of creditors to come up with a plan for reorganization. This plan must be approved by the court to receive protection from creditors. The plan can include the sale of assets or debts, getting square on secured debt, and discharging unsecured debt.
- Taxes
Depending on individual circumstances, bankruptcy can allow debtors to wipe out mortgages and car loans secured by collateral. However, the lender has the right to seize the property if the debtor defaults. This is a big reason many people choose to reaffirm their debts rather than eliminate them in bankruptcy.
A bankruptcy filing cannot eliminate tax debt unless the taxes are more than two years old and there is no evidence of fraud or willful evasion. A bankruptcy can, however, prevent the IRS from garnishing wages or levying bank accounts while allowing you to catch up on missed payments.
Most people who file bankruptcy use Chapter 7 to liquidate nonexempt assets and start over. The Chapter 13 bankruptcy process allows individuals to keep all their assets, even if they could lose them in Chapter 7. There are also specific provisions for farmers and fishermen that give them more flexibility in this type of bankruptcy. Depending on your situation, you may be able to use the Chapter 13 repayment plan to help you get back on track with your tax debt. Be sure to reach out to bankruptcy attorneys in Harrisburg PA or a professional before making any bankruptcy decisions.
