Bankruptcy? Don't Get Messy With It
Despite the serious short term and long-term effects associated
with filing bankruptcy, the number of people filing bankruptcy
lately has been on the increase. It is estimated that 5.4 people
out of 1000 filed for bankruptcy last year and that this rate
has been growing at an average of 7%. The alarming ease with
which people file for bankruptcy is a growing cause of concern
for governments and financial organizations.
What is Bankruptcy? The word, Bankruptcy, means 'broken bench',
literally. In the past, during the early days of banking and
trading, when a debtor could not pay off his debts, his
workbench was broken into two as a punishment and also as a
warning for other debtors. But in recent times, the term is now
used as a legal tool to help an individual or business discharge
its burden of debts without been swallowed up by it. It is now a
legal term, meaning that an individual cannot, within reason,
pay off his various debts and has allowed the court system to
take over his finances for the purpose of easing off his debts.
Bankruptcy laws were enacted in order to protect both debtor,
and creditor. The laws were enacted to provide equal and fair
measures to satisfy the objectives of all parties. The primary
purpose of the laws of bankruptcy can be split in two:
- To give an honest debtor a fresh start in life by relieving
him most of his debts
- To repay creditors in an orderly manner to the extent that the
debtor has property available for payment.
Several studies over the years have shown that the primary cause
of personal bankruptcy is uncontrollable levels of consumer debt
which in most cases is coupled with an unexpected event, such as
a major medical expense not covered by insurance, the loss of a
job, divorce or death of a spouse. According to economists'
surveys, the classic bankruptcy filer is a blue collar, high
school graduate who is the head of a household in the lower
middle-income class with heavy use of credit.
Different types of bankruptcy exist in different localities and
countries, defined by legal codes for certain purposes. The
exact types of bankruptcy available differ from one country to
the next, in the United Kingdom for example; bankruptcy can only
legally be applied to individuals and partnerships, whereas in
the United States and Canada, it can be applied to businesses as
well.
There are two basic structured plans for filing personal
bankruptcy, these are known as Chapter 7 and Chapter 13. The
chapter 7 plan requires debtors to liquidate all non-exempt
assets, such as retirement programs, and have them distributed
among his creditors, while the Chapter 13 plan does not require
liquidation. In this plan, the debtor concedes to a payment
arrangement where a portion of his unsecured debts are paid and
the balance forgiven. Most personal bankruptcy filers chose the
chapter 7 option.
When filling for bankruptcy, you will need the services of a
Bankruptcy lawyer, and getting an experienced lawyer who has
handled cases similar to yours may be an important first step.
When you have filed for bankruptcy, the court will normally
appoint someone to work out the payments to your creditors and
to determine how much of your income must go into repaying these
debts. The court will either allow you to make payments, or more
likely, will deduct a portion of your pay check toward this
goal. And during this process one of the primary side effects is
that your credit options will be very limited, due to both legal
action and the reluctance of creditors to issue credit lines to
individuals who have declared bankruptcy. Although, once the
amount set by the court has been paid off, the bankruptcy will
be cleared and you will be able to start rebuilding your credit
from the start again. It may be years before creditors start
trusting you after declaring bankruptcy. If you rebuild you
credit well enough, it probably won't take too long, but
certainly, for a couple of years you are not going to be credit
worthy.
Because of the lasting effects of filing bankruptcy, it is
advisable to only declare bankruptcy as a last resort. Try out
every other alternative, talk to an experienced lawyer and see
if there are options to be considered before declaring yourself
or your business bankrupt. In most cases, there are always
better alternatives to be considered.
- You could sell off some assets to clear your bills when you
notice that you are getting financially trapped and may be
running into trouble.
- Reduce your expenses and cut out all non-essential costs.
- Consult with a specialist, e.g. an accountant, maybe you could
work out a plan to enable you gradually pay off your debts
without been swallowed by it. A good budget, when strictly
adhered to, could pull you out of a terrible situation in no
time.
- You could also consider refinancing some assets and using the
surplus to pay off your debts.
- You could also arrange something like a Creditors' pool. Here
you will need to arrange with all your creditors to create a
pool run by an accountant, where you pay a certain amount of
money into the pool as arranged and the money is distributed to
your creditors until your debts are paid.
If none of this works, then you could consider filing for
voluntary bankruptcy to stop the situation from getting too bad.
The bottom line is, don't jump into this mess called bankruptcy,
until you have convinced yourself it is the only option left.