Benefits of Declaring Bankruptcy
When it comes to personal finances, bankruptcy is probably considered the worst-case scenario, the point at which you can no longer afford to cover your debts. In the game of Monopoly, it’s quite literally game over. And that’s how a lot of people view it in the real world as well.
A fate reserved only for the most reckless among us financially or those who keep landing on their opponents boardwalk hotel.
But there are a lot of misconceptions around the topic of bankruptcy. For one, well, yes, overspending and poor financial habits are key contributors to insolvency in many countries.
There are a number of other common causes, some of which have an exogenous feature to them In the US. Benefits of Declaring Bankruptcy
For example, the majority of bankruptcies are actually the result of medical expenses, not poor financial habits.
Job loss is another key contributor, a risk that we all naturally face. Because of the stigma around bankruptcy, we’re never really taught about how the process goes down.
It’s often believed that if you have to ask, you’re already too far gone.
Whether you’re just interested in how bankruptcy goes down or you’re in a position where you’re seriously considering it, I’ll go over the basics of the process, including how it varies from place to place and why it’s not the life sentence that we all make it up to be. Benefits of Declaring Bankruptcy
So let’s clear the air around the bankruptcy of today’s claim. Bagel debt is a lot like fire.
In certain applications, it can be incredibly useful, but it’s also very easy to lose control over. And if you aren’t careful, you’ll end up burning yourself.And when you find yourself completely engulfed in flames, bankruptcy is the metaphoric fire extinguisher.
As you’ll see, the rules around bankruptcy vary depending on where you live. But the basic idea is universally the same a tool to give people a way out of crippling debt.
It all starts when someone becomes insolvent that is, they are no longer able to meet their financial obligations as they come due.
Being insolvent is a very disadvantageous position to be in. It opens you up to lawsuits and liens from your creditors. Benefits of Declaring Bankruptcy
And for certain secured loans, like a mortgage or a car loan, it means having your assets repossessed and sold.
There’s also, of course, the dreaded debt collector calls, which oftentimes border harassment and can really make your life miserable.
It all makes for an incredibly stressful experience, and it’s why bankruptcy is more of a lifeline than a punishment for those in this position.
Now, bankruptcy is by no means a free pass where you get out of your debt scot free. There’s still a lot of work that goes into recovering from insolvency and a lot of consequences to declaring bankruptcy. Benefits of Declaring Bankruptcy
But it can be a good option for people who are already trying to cut their costs to the bare minimum and still can’t manage to get on top of their debt, Which brings us to the process of declaring bankruptcy.
Now unfortunately, it’s not as easy as popular TV shows have led us to believe. I declare bankruptcy. You see, bankruptcy is actually illegal status imposed by the courts
it comes about in one of two ways.
The first is known as forced or involuntary bankruptcy. And yeah, it’s about as aggressive as it sounds because it’s when your creditors petition the courts to have you, the debtor, declared bankrupt, usually because the debtor has the money to pay them back and simply chooses not to.
It can also be brought on if you’re caught doing more sketchy stuff. Things like hiding your money, gifting it to relatives, or even trying to flee the country.
Anything that could be perceived as you trying to avoid paying your obligations.
Now, pulling a bank high style getaway with a giant sack of cash to avoid paying your creditors isn’t, generally speaking, recommended.
And in truth, this style of bankruptcy is pretty rare. The much more common approach is where you file for bankruptcy yourself. Benefits of Declaring Bankruptcy
Now, there are different types of bankruptcy that you can file for in the US. The most common two for personal bankruptcies anyway are chapter seven and chapter 13.
In reference to their respective positions in bankruptcy law, we’ll touch on both. But we’ll start with chapter seven known as liquidation.
Bankruptcy, the type we all think of when we picture bankruptcy and the form that’s most similar to standard bankruptcy in other countries, including here in Canada.
Liquidation bankruptcy, as you might have guessed, involves the selling of all your assets to try and recuperate as much money as possible for your creditors.
This is done by an assigned trustee who will take possession of your assets, sell them, and then distribute the proceeds as deemed appropriate.
Now, contrary to popular belief, this doesn’t actually leave you with nothing but a barrel to cover your modesty.
They’ll probably take your barrels too. But joking aside, there are actually a number of items exempt from liquidation here, including clothing, vehicles and furniture, all up to specified values, certain types of retirement, pensions and savings, and even at times, some of your home equity. Benefits of Declaring Bankruptcy
The exemptions do, however, vary from country to country, state to state, province to province, and whatever have you.
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So it’s worth going over the rules of your jurisdiction and before you get the idea of stuffing your money into one of these exempt assets before declaring bankruptcy, I should note that courts do consider your transactions and transfers leaving up to your filing and will look for evidence that you are abusing the rules.
So, while a last-ditch contribution to an exempt retirement account might seem like a good idea, it could actually throw your whole recovery from insolvency into jeopardy and you may actually be denied your bankruptcy claim.
Now, the actual process of filing a chapter seven bankruptcy involves paying a court fee, filling out certain documents, and disclosing all kinds of information about your financial situation, including the debt you owe, who you owe it to, the money you have, income, expenses, so on and so forth.
In the US, You can do this yourself or through a lawyer, while in Canada you generally have to hire a licensed insolvency trustee. Either way, a professional really does help with the process but does come at an extra cost
The US Also requires that you engage a credit councilor prior to your filing, and there are eligibility criteria that you must meet to file for this type of bankruptcy.
Namely, your income and the amount you owe must both fall below certain thresholds, and you need to have not tried to escape the country with a second cash.
But assuming that all checks out, the moment you file for bankruptcy, you become protected from your creditors, most of your debt payments will stop, outstanding lawsuits or liens will terminate, and creditors will no longer be allowed to call you to demand payment. Benefits of Declaring Bankruptcy
From this point, you may be required to attend what’s called a meeting of creditors, where the case trustee, the person who’s assuming control of your assets and then selling them, will bring together all the parties involved to discuss how nonexempt assets will be split.
You’ll also be required to continue submitting information about your finances, and you’ll need to attend some credit counseling sessions to help ensure that you can reform your financial habits and to help avoid future bankruptcies because subsequent filings become very much less lenient.
But assuming all the rules are followed and creditors don’t have an explicit reason to object, like you trying to flee the country, once again, the bankruptcy ends with you being discharged of the applicable debts, at which point you are relieved of your obligations, creditors will forfeit their claim over the applicable outstanding loans, and you will no longer have to make payments towards it.
Now, as great as that sounds, it is worth noting that not all types of debt can be extinguished through the bankruptcy process.
Secured loans are given special treatment through the bankruptcy process in the US And are completely unaffected by bankruptcy in certain countries, including here in Canada, while child support, alimony, and in some cases, unfortunately, even student debts will also require payments even after you go through the bankruptcy discharge process. Benefits of Declaring Bankruptcy
There are also, of course, some serious downsides to bankruptcy that need to be considered before filing. Outside of the forced liquidation of your non exempt assets and the costs of the process.
Bankruptcy tends to last on your credit report for around seven years time, wreaking havoc on your score during that period, which means it will be very difficult and expensive to use credit in the future.
Bankruptcies can also impact your professional life, as employers may consider your credit history when deciding whether or not to hire you.
Still, for those who are already insolvent and unable to get ahead, the dropping your credit score and impact on your life will likely be marginal to what you’re already going through.
And thankfully, credit scores are designed to heal over time. Again, recovering from bankruptcy takes work, but you will eventually move past its impact on your life.
Now, for those who haven’t yet reached a point where liquidation bankruptcy is required, there are thankfully some alternatives to consider if you find that you’re struggling with your debts. Benefits of Declaring Bankruptcy
For one, like we mentioned, there’s Chapter 13 bankruptcy in the United States known as a consumer proposal here in Canada, although the processes are slightly different.
Here, the consumer negotiates with creditors to come up with a compromise, a payment plan to pay off all or most of the amount they owe over a longer period of time.