What Are the Advantages of Filing Bankruptcy?
You read a lot of opinions on whether or not you should file bankruptcy. They go both ways. Some sources tell you should file to stop creditors from harassing you and to provide a court designed restructuring of your debt to make it easier to repay. Some sources tell you to avoid bankruptcy at all costs because it will ruin your credit for at least seven years.
Honestly, both sides are right.
I know that sounds odd, but whether or not you should file for bankruptcy depends on your situation. No two situations are exactly the same. You must analyze your own situation and determine which option works best for you. Let this article act as a jumping-off point to get you started before your find a source of file bankruptcy online.
Declaring Bankruptcy - The Scary Truth
When you declare bankruptcy, you effectively ruin your credit for seven years. No lender will provide you a loan or a credit card. You cannot obtain secured cards during this time either. You must learn to live off of only what you earn because you will have no credit whatsoever for seven years.
Ok so now that we know this, let’s talk about some advantages of filing bankruptcy when you realize you have no other options left.
Triggering the ‘Automatic Stay’
This is the first and probably one of the biggest advantages because the real threat is stopped - debt collectors. Anyone who is out for you and your money is stopped by the Bankruptcy & Insolvency Act, which means no more wage garnishments, calls/letters from debt collectors, or lawsuits, and creditors can’t repossess your property.
Dischargeable Debts
You may be able to cancel your obligation to pay the debts you acquired. Dischargeable debt can be eliminated if you decide to file for bankruptcy and this debt usually includes medical debt, credit cards and personal loans.
Asset Exemption
If you file for bankruptcy, you may be able to exempt an asset, which means it can’t be seized during the process. This point is especially relevant for Chapter 7 and 13 (which we’ll discuss in more detail down below). You should know that there are different types of exemptions, for example, only a certain type of asset can be exempt or there is a maximum dollar amount (value) that can be exempt.
Improving Credit Score
What?! But we said bankruptcy stays on your credit report for at least 7 years. Yes, and although that’s true, we see the tendency that people start to improve their credit scores after they file for bankruptcy and deal with their debt.
The Psychological Benefits
This is not really related to court, money or creditors, but imagine you finally deal with your debt after years of drowning in it. This way is maybe not the easiest one, but if you really don’t see another way out of your situation, it’s absolutely worth it!
The Chapters of Bankruptcy
Multiple types of bankruptcy exist. The US Congress codified the concept and frameworks of bankruptcy in law, so each type gets explained in a different “chapter.” The most commonly known types of bankruptcy are Chapter 13 and Chapter 9. As that intimates, the type of bankruptcy number in the double digits. Those other types refer to special situations and to businesses that declare bankruptcy. Chapters 7 and 13 refer to individuals declaring personal bankruptcy.
For your edification, here are the other types of bankruptcy:
Chapter 9 lets municipalities, like your township, declare bankruptcy
Chapter 11 lets businesses file bankruptcy for reorganization or rehabilitation
Chapter 12 applies only to family farms and fisheries
Chapter 15 applies to international organizations
Chapter 7 and Chapter 13
Most people file for Chapter 7 bankruptcy because it restructures debt and the court tends to approve it. You still repay your debt this way, but you make smaller payments and you get to keep your house, typically. The court can require you to sell stocks, bonds, etc. to pay the debt you owe.
Most people want to try for Chapter 13 declaration because it wipes away all debt. You no longer owe it. The court declares you insolvent and typically, liquidates what you own to pay off what it can. You begin again owing no money whatsoever, but you also restart at zero. Zero dollars, no house, no car, etc. You will have your clothing and your job, if you have one. This type proves very hard to obtain.
Neither really provides a pretty picture, but both let you get out of debt. With Chapter 9, your creditors typically negotiate a percentage of the debt to receive. The court lumps everything you owe into one payment that you typically make to it. With Chapter 13, you owe nothing, but you typically own nothing anymore either. Recent updates in US law made it tougher to obtain Chapter 13, but before that, it still got awarded or approved less than half as often as Chapter 7.
Why is Chapter 13 so tough to obtain?
The court does not like to wipe the slate clean. It reserves 13 for cases where the person could not capably pay off the debt. That does not mean the individual would find it challenging. It typically means they would be physically incapable of doing any type of work to earn money to pay the debt.
See, the courts think logically and rationally. You can get a job. You can get a second job. You can earn lots of money that way. You downsize to a cheaper place to live. You liquidate your assets. You pay your bills. Voila! You got yourself out of debt. They will help you with a Chapter 7 restructuring, but that is all, typically.
Now, let’s say you were involved in a horrific car accident. You survived, but as a single person, while you could not work, you could not earn money to pay bills. You amassed huge hospital bills. You now cannot work due to your injuries. Not that you cannot work at what you used to do, but you literally cannot work because due to brain damage and physical damage, you can no longer function as an adult. You qualified for and obtained full medical disability.
Let’s say, you were injured though and although it was tough, you recovered. You used to work construction, but nerve damage in both hands now precludes that. Your brain works great though, so you can go to night school, online classes, or back to college to become a certified public accountant or an account manager for the construction firm. You get Chapter 7 because you can work. You just cannot do the same job. You do need a break on the payments. You do need your debt restructured.
In the 1970s, Chapter 13 was very "popular”
In the 1970s, everybody wanted to file Chapter 13. Commercials pervaded television with the message “Wipe away all your debt.” People filed for Chapter 13 in droves. By the time a couple of decades passed, Congress realized that this really hurt businesses of all sizes. People were walking away from their debts left and right. They might have felt overwhelmed, but that did not make it right. The fiasco caused significant economic damage, so Congress made it tougher to get Chapter 13, but easier to qualify for Chapter 7.
The old school way of American thinking pervaded. Tighten your belt. Stop spending on frivolity. Reduce your way of life temporarily. Liquidate what you can to pay off debt quickly. Negotiate with the debtors.
Along the way, other alternatives to bankruptcy sprang up. Among these, credit counseling and debt consolidation topped the list. They both provided a free method of helping people get their finances back in order without filing for bankruptcy.
Need Extra Help Managing Your Debts? Meet Debtry.
Dealing with Debt Before Bankruptcy
Trying Credit Counseling
Maybe you have not let the financial situation get completely out of control yet. You can try credit counseling. This refers to a type of financial therapy. Rather than a psychiatrist, you attend weekly appointments to learn how to better manage your finances. You typically agree to cut up your credit cards so, you can no longer use them. The counselor helps you learn how to manage living only on what you get from your paycheck.
While this might sound just as gut-wrenching as bankruptcy, it saves your credit. If you could physically hold down a second job and conceivably pay off the debt, you should try this first. So, forget asking “What are advantages of filing bankruptcy?” and avoid the big negative of it by getting counseling first.
The second job provides you extra income that you can spend only on paying off the debts. Once you make six months of on-time, full payments to your creditors, your credit score increases. Just six months of living right can begin the turnaround for your fiscal situation. You could drive an Uber or Lyft for the extra money or deliver for Grub Hub. Imagine how awesome it would be to earn an extra $100 per day. That is what many Uber drivers make for a four-to-six-hour shift in a major city. Now, you start to see how viable paying off the bills really is.
The credit counseling service also typically contacts your creditors for you to let them know you began participating in their program. This tells the creditors you want to handle your debt. It shows them your responsible nature and they sometimes agree to provide you a forgiven late payment or such. The credit counselors teach you better financial management in one-on-one meetings and sometimes in group classes.
Debt Consolidation Through a Non-Profit
Let me start this with a caveat. Some organizations advertise debt consolidation, but they run a business. They work with creditors and their “deals” can do more harm than good for you. With that said, you can avoid asking “What are advantages of filing bankruptcy?” and essentially obtain the restructuring and smaller debts without killing your credit for seven years.
Genuine non-profits do exist. These organizations do not make money off of your problem nor do they make money off of the credit card companies. These options typically run locally or at the state level. Phone your state’s office of the attorney general to find out about these non-profits.
Hybrids between these two options also exist, like Care One Debt Relief, also known as Care One Credit Counseling. The latter two options work the same way. You agree to cut up all your credit cards. Once you enter the program, you cannot open a new credit line until you finish the program. You provide the account numbers and other relevant identifying data for every credit card or loan.
The consolidator contacts each one for you, negotiating a reduced debt. This can result in a 20 to 40 percent or greater reduction in your debt. Sometimes, you will only owe 40 percent of what you previously did. They sometimes can get the interest rates reduced or frozen.
By virtue of participation, you agree to let the consolidator close all of your credit accounts. Although closed so, you cannot find a way to add new charges, you must continue to pay off the debt.
All of the lending institutions agree to a unified due date. You make a single payment each month to the consolidator who then disburses each portion of the payment to the appropriate creditor.
Now, since you consolidated and pay a reduced rate, your timely payments do not work to increase your credit rating as they would with simple counseling. In fact, for a brief time, you may see your credit score take a dip. That comes from the debt write off. That’s what it is called when your creditor agrees to erase part or all of your debt. They give up on trying to collect it from you and write it off. Although it appears as paid or forgiven on your credit report, the write off causes your credit score to dip. This is temporary.
As you make payments, you receive monthly reports to show your progress. As soon as a creditor gets paid off completely, they drop off of the report. Celebrate the beautiful day your report gets shorter by cooking yourself a nice meal or watching a movie on Netflix. However, you can celebrate for free so, you save money.
You Do Have Other Options
Okay. I get it. Long ago, in land far away called my 20s, I racked up a ton of credit card debt. That is why I know this works. My undergrad and grad school years were full of studying, working, and shopping. Yeah. I had more shoes than Imelda Marcos. (You need to know history to get that reference.)
I promise you that debt consolidation works. You can pay off all your debts regardless of how insurmountable they might seem. You can do it!
Most people get stuck in the lazies or the negatives.
What are the lazies? Glad you asked.
The lazies refer to when you just want to kick back after 5 pm each weekday and on the weekends. You do not have to be in debt but, damn, you just do not want to work anything more than your 40 hours a weekday job. Oh well.
Here is my tough love statement, dear reader. (Yeah, I am a Stephen King fan.) You have to get a second job. You need more income to quickly pay off the debt. It will not just go away.
No, they cannot put you in jail. What they can do is sue you in civil court. You might laugh because you say you own nothing. Here is what the court typically provides as remedies when you do not yet own a house or car or stocks – your paycheck. Yep. The court will garnish a huge chunk of your paycheck. You will literally never see it. They withdraw it similar to the way the feds withdraw your Social Security and income tax withholdings. You will get about 60 percent of your pay-to-pay rent and utilities. That is all. The other thing they can take is your federal and state payments. They get any income tax refund you would have typically received.
You can avoid that. Get a job.
The negatives, you inquire?
You have a horrid case of the negatives when you say things or think things like, “I can never pay off all of this!” “I am screwed.” “I may as well give up.”
Skip the negatives. They do you no good. Neither does just thinking positively.
You can think, “I got this.” and “I can pay this off.” all day long, but you must actually combine that with positive action for it to work. Positive action includes following the advice of sites like Budgetry that teach you how to budget your money and plan to pay off debt. You combine that with sites like Debtry.com that provide information and tools to help you get a handle on your debt.
Start with this practice
Choose one credit card. Make it the one with the smallest balance. Write down the total due. Ignore what the statement defines as the minimum due payment. Divide the total due by 12. Let’s say your smallest debt equals $414. Divided by 12 that means you would need $34.50 per month to pay it off as long as it charges no interest. Now, look at your monthly finances. Get out your bank statement. See those shoes you bought for $40? You will stop spending that $40 for six months. Instead, you will pay it and the $34.50 to the credit card company.
Six months later, do you know what happened? You paid it off six months early! Because you paid on time every month, the credit card company reported wonderful things about you to the credit bureaus. Even though you only made the minimum payments to the other card companies, because you paid everything on time, your credit score jumped up. If you had poor, fair, or good credit, you gained a whopping 25 points. You also paid off that card. Don’t you feel great?
Final Thoughts
You took control of your situation. You did not just think positively, you behaved positively. Now, you eradicated a debt in just six months and you achieved something you once thought you could not. You did that!
Forget about asking, “What are advantages of filing bankruptcy?”
Take control of your situation in a way that lets you avoid bankruptcy. Instead of needing Chapter 7 or Chapter 13, you used common sense, positive actions, and the Goalry brand of sites to get started repairing your finances. You can do this and Goalry can help. Register for your member key (our fancy term for login) that works on all of our sites. Start with Debtry so, you can get your finances under control. Maybe you can catch it all up with just counseling or debt consolidation. We want to help you avoid bankruptcy.