Why Bankruptcy May Be the Best Option For You

If you have tried – and failed – to make a dent in your debt with other debt-relief options, bankruptcy may be the best option for you. However, it will negatively affect your credit score for up to 10 years. 

To avoid bankruptcy, try to cut nonessential spending and sock away any extra cash you can put toward paying off your debt. Communicate with creditors proactively to see if they can lower your interest rate or monthly payment. 

1. You Have No Way to Pay Your Debts 

Bankruptcy is a powerful tool that offers a fresh start by forgiving debts you can’t pay. However, it also has consequences that should be weighed carefully. 

For example, a bankruptcy will usually cause your credit score to drop. It will also remain on your record for a while and may make it difficult to obtain new credit, especially at competitive rates. 

It is essential to have a solid budget that outlines what you spend your money on, how much you make and where it’s going before considering bankruptcy. Budgeting is hard work, but it can help you determine whether bankruptcy is really worth the consequences. 

In a typical bankruptcy, a court-appointed official, known as a trustee, will liquidate any non-exempt assets (like property that isn’t necessary for day-to-day living) to pay off creditors. This process erases many types of debt, including unsecured consumer and mortgage loans. It doesn’t, however, get rid of child support, alimony, fines and taxes, or debt that is secured by collateral such as a car or home. 

2. You Are Behind on Your Payments 

Most financial experts look at bankruptcy as a last resort, to be carried out only after other debt relief methods have failed. Bankruptcy ruins credit, makes it difficult to get new loans and sometimes prevents people from keeping their home or car. 

Nevertheless, there are ways to recover from bankruptcy quickly and with less damage to your credit score. One option is to take out a loan backed by collateral or to use a debt consolidation program. Another is to make an honest effort to pay off your debts and to develop healthy spending habits that will help you avoid future trouble. 

Debt collectors can't contact you, deduct money from your bank accounts or garnish your wages once you file for bankruptcy. However, they can pursue court judgments against you for unpaid bills. A judgment may allow them to keep some or all of your property. Debt collection judgments are usually reported to the credit bureaus and can be seen by employers, landlords and lenders. 

3. You Have Collateral

If you have debts connected to collateral, like a home or car, filing bankruptcy can help protect those assets. Typically, a lender can't repossess or foreclose on the collateral unless you miss a certain number of loan payments. Then, you will be considered in default. The lender can then foreclose on your property or take it back through a process known as lien stripping. 

A bankruptcy can also stop collection calls and halt foreclosures, garnishments and wage attachments. It can even erase certain types of unsecured debt, such as credit card debt. 

Before you file, however, consider alternatives. A credit counselor can help you create a budget and make changes to your spending habits. And a debt management plan can often reduce your debt burden with less damage to your credit score than a bankruptcy. It also might keep you from having to declare bankruptcy at all. If you do decide to declare bankruptcy, an experienced Harrisburg bankruptcy lawyer can help. 

4. You Have Special Debts 

While bankruptcy is often viewed negatively, in some cases it can be the best option to clear your debts. However, it's important to consider your options carefully before filing. For example, if you are struggling to pay your debts and have already fallen behind on payments, you might want to consider working on getting back on track and talking with a credit counselor before making the decision to file for bankruptcy. 

Another important consideration is that while bankruptcy can stop lawsuits, wage garnishments, and bank levies, it doesn't eliminate all types of debt. For example, it's difficult to discharge child support, alimony, and most tax debt. 

In some instances, creditors may agree to settle these debts for less than what you owe, as is the case with student loans. Moreover, there are prepackaged bankruptcy plans that can shorten and simplify the bankruptcy process, saving you money. However, these plans are not available to everyone. You must pass the means test and demonstrate that you can't afford to repay your debts to qualify for these plans.