Managing your personal finances (or even your business numbers) can be trickier than you think. There’s more than just income and expenses in your life, there’s also credit, debt and loans; all of which you need to know how to juggle correctly. And, as it happens, with any sort of personal management, sometimes things can get out of hand and you can end up needing to file for bankruptcy. If you don’t really know what this concept is, when you should consider it and how to handle it, keep reading this post.
What is Bankruptcy?
Before you consider taking this big and important step, you must know what exactly is the state of being bankrupt. Bankruptcy is a legal process specifically designed to help people or businesses to wipe out a part or all of their debt, in order to help them repay a portion of what they owe on better terms.
Bankruptcy must be overseen by federal bankruptcy courts, and it can be a process that you apply for yourself. However, on occasions, someone you owe money to can ask federal courts to make you bankrupt against your will. This means that bankruptcy is not a process you exclusively file for yourself.
Should People File for Bankruptcy?
The most important part about bankruptcy is that it’s not a decision to be taken lightly, since the consequences are plenty. It’s widely known that people apply for bankruptcy when they simply cannot pay back their debts. However, before courts allow you to file for bankruptcy, you’ll need to meet with a nonprofit budget and credit counseling agency.
After this meeting, you’ll also need to complete a course in personal finance management before the bankruptcy is approved. Both of these requirements are stated so people can be aware of the seriousness of this decision.
Do You Qualify for Bankruptcy?
Before we get to explain some of the main requirements to apply for bankruptcy, it’s important to note that there are three types of bankruptcy:
- Chapter 7 Bankruptcy: When you apply for chapter 7 bankruptcy, the federal court will access any property you have and make means of it, selling these assets in order to use the money to pay off your debt and wipe out your balance.
- Chapter 11 Bankruptcy: Chapter 11 bankruptcy has some benefits since it means that the debtor remains in possession of their actives and can even still be in charge of their business. The debtor can borrow more money and a reorganization plan is devised, which all creditors must approve. Chapter 11 bankruptcy is also called a “reorganization bankruptcy”.
- Chapter 13 Bankruptcy: In the case of chapter 13 bankruptcy, you get to keep your properties and the federal court devises an extended payment plan in which you’ll have to pay your debts partially or totally to wipe out your debt.
To qualify for either Chapter 7 bankruptcy or chapter 13 bankruptcy, you can’t have filed for any type of bankruptcy in at least 5 years. You also need to prove that your income in the previous six months is lower than the median income for a same-sized household in your state. You’ll also be investigated to avoid creditors-fraud.
What are the Pros and Cons of Filing for Bankruptcy?
Some of the main benefits of filing for bankruptcy are that most of your creditors cannot take further actions against you, all of your wages from the moment your bankruptcy is discharged are yours to keep and, only for Chapter 13 bankruptcy, you don’t lose your properties.
On the downside, filing for bankruptcy is a very open and public process that everyone can know about, you’ll need to get rid of all the luxury items you possess and it’s going to be hard to rebuild your credit after this situation.
Of course, filing for bankruptcy can have some important limitations to your regular lifestyle. You might have a harder time leaving the country, you’ll still have some types of debts since not all of them will be wiped out and this effect does not protect other people like your spouse, partner, or children (but they won’t be affected by it as well.)
How to Recover from Bankruptcy
The word “bankruptcy” sounds quite scary and can make anyone nervous. But the truth is, there is a large percentage of individuals and even big companies who’ve filed for bankruptcy at least once as a way of letting them reassess their financial state and put things in order.
The important thing to remember is that bankruptcy is not a death sentence and you don’t have to go through it alone. The first thing you can do is reach out to a lawyer and get legal assistance through the whole process. In addition to this, there are some steps you can take in order to slowly recover from bankruptcy and get your life back on track.
Start Tracking Your Income and Expenses
Even though this is pretty basic, you must be even more aware of your income and the current expenses you have. This is in order to be able to avoid building up debt and having to end up in a bad situation again.
Related: 8 Effective Money Management Tips
Pay Your Bills on Time
Not only will this tip help you avoid creating big debts that you won’t be able to pay in the future, but paying your bills on time will also slowly build your credit score again. This is crucial if you want to get a loan later in life.
Look for Different Methods to Boost Your Credit Score
Bankruptcy can damage your credit score for up to 10 years, so it’s important that you find alternative methods to build your score. You might want to check with utility companies and even your landlord (if you rent a house or apartment) to see if they participate in any service that reports your on-time payments to credit bureaus to improve your score.
Use a Secured Credit Card
Secured cards have a credit limit that’s based on a cash deposit you must make and acts as collateral. By this, banks can lower their risk of “lending” you money once your credit score has been affected. Your bank will report your on-time payments directly to credit bureaus so you can rebuild your credit.
Regularly Monitor Your Credit Reports
Since the most important thing to get back after bankruptcy is your credit score, you must keep up with it and be able to monitor it on a credit score checker website at least once a month to see how it’s building up again.
Now you know that filing for bankruptcy is not a terrible situation. It’s actually a great opportunity to help you get things straight, get some stress off your back, and help you reassess the way you manage your finances.