Filing Bankruptcy

What to do when you're in over your head

Every year, thousands of businesses and hundreds of thousands of individuals file for bankruptcy in the U.S. Whether due to bad luck, unpredictable markets or poor planning, filing bankruptcy is often an appropriate means of reorganizing your finances.

Here are a few things you should know before you file for bankruptcy:

Alternatives to bankruptcy

People and businesses fall into debt when their income is not enough to meet their expenses over a given period of time. Before filing for bankruptcy, try as hard as you can to reduce monthly spending to allow as much extra money as possible to be allocated toward paying off your debts.

You can also try to negotiate with your creditors. Most creditors will be willing to negotiate a settlement to get a portion of their money back, rather than risk losing everything in a bankruptcy. Negotiation can also buy you some extra time to repair your financial situation.

What happens?

What happens when you file for bankruptcy depends on the type of bankruptcy you file. Here is a look at Chapter 7 and Chapter 13, the two most common forms of bankruptcy:

  • Chapter 7: The debtor will surrender their non-exempt property, which will then be liquidated and distributed to their creditors. In exchange for this surrender of property, the debtor will be discharged of debt. (Examples of exempt property include clothes, older cars and household goods).
  • Chapter 13: The debtor keeps ownership over all of their assets, but must commit a portion of their future income to paying back their creditors, usually over a three to five year period.

In addition to repaying money owed to creditors, filing bankruptcy wreaks havoc on your credit rating, making to more difficult for you to secure credit in the future.

How to file

Once you have decided to file for bankruptcy, you can either do it yourself or enlist professional help. Filing bankruptcy is a legal process (and thus a complicated process), so it might be a good idea to hire a bankruptcy lawyer. A lawyer will help guide you through the process of submitting your forms and communicating with the bankruptcy trustee and your creditors.

Life after bankruptcy

Filing for bankruptcy isn't the end of the world. In time your credit rating will rise back up, your finances will once again be under control and you will emerge a wiser, more experienced person.