Getting into debt takes very little effort on a person’s part. Paying off debt once it has amassed tends to be extremely difficult. Individuals often underestimate how much they will pay in interest and other fees and find they are in over their head in little time. For this reason, numerous people in their twenties are now opting to file for bankruptcy to secure a better financial future. Even those who come from a financially stable family may find they are in this situation. However, is bankruptcy the best option?
Chapter 7 Bankruptcy
Chapter 7 bankruptcy erases a person’s debt in full with certain exceptions. This provides the person with a clean slate to begin again. However, numerous individuals find the debt that remains is still overwhelming and they aren’t better off financially like they imagined. Furthermore, certain assets must be surrendered as part of the process, and bankruptcy attorneys charge a fee for their assistance. This fee is paid either as a lump sum at the beginning of the process or over a period of several weeks.
Individuals must recognize certain types of debt will not be erased when this option is selected. Student loans are very difficult to get discharged as part of a bankruptcy and the same is true of child support obligations. The debtor needs to speak to an experienced attorney to learn which items he or she may be able to keep as part of this process and which debts will remain once the bankruptcy filing has been approved.
Chapter 13 Bankruptcy
In contrast, chapter 13 bankruptcy enables the debtor to retain some of his or her assets. Nevertheless, the debt is not erased but must be paid over a period of three to five years. Any debt remaining at the end of the monthly payment plan is then erased. With this option, individuals find the attorney fee is rolled into the monthly payment as opposed to being due at the start of the process. The no-fee-up-front practice remains common among bankruptcy attorneys and the fee tends to be higher than if paid up front. Furthermore, individuals who find they cannot adhere to the repayment plan as agreed will have their case dismissed and the debt remains their responsibility.
Duties of the Attorney
Once an individual files for bankruptcy, he or she is instructed not to speak to creditors. The attorney handles all communications with creditors when the paperwork has been filed, and the debtor stops making payments on the debt. Furthermore, creditors are prohibited by law to contact a debtor following a bankruptcy filing. Be aware the first payment of the repayment plan is also due before the first court hearing on the matter.
The Bankruptcy Hearing
A person may be hesitant to file for bankruptcy as he or she fears appearing in court. However, most cases of this type are handled in a casual manner and the entire process within the courtroom may only take a matter of minutes. Once the filing has been approved, the debtor is officially bankrupt. Those who filed for Chapter 7 find the majority of their debt has been erased, in most cases, and individuals who filed for Chapter 13 will continue to make payments on the payment plan for the predetermined period of time.
The Benefits of Bankruptcy
Debtors who file for bankruptcy often feel relief upon doing so. They have a plan to deal with their finances and can improve their financial situation in less time than they originally imagined. Much of the debt may be erased, making it easier to pay on any debt that remains. However, there are drawbacks to this process that individuals need to be aware of.
The Drawbacks of Filing for Bankruptcy
Bankruptcy typically results in a person’s credit score dropping, and this can have a negative impact on the individual’s ability to secure credit, rent an apartment, obtain a mortgage, or secure a job. Furthermore, the person must report the bankruptcy on various official documents the rest of his or her life, and the bankruptcy is a matter of public record. Anyone who wishes to obtain information about this legal action can do so easily.
Bankruptcy isn’t the only option for those individuals who find they are drowning in debt. A person may wish to look into debt consolidation loans, work directly with creditors to pay down the debt, or borrow from family and friends to get their head above water once again. Each option has its benefits and drawbacks that need to be considered before any decision is made. What works for one individual may not be appropriate for another, so be sure to take the individual circumstances into consideration when weighing each choice.
Admitting to overwhelming debt is something individuals don’t wish to do. However, this is the first step in overcoming the problem and securing a financial future that is significantly brighter. A person can then thoroughly evaluate his or her debt relief options to determine which solution best meets his or her needs.