When Bankruptcy Is the Right Option
Filing bankruptcy should always be the last resort. It has a profound impact on your credit rating, which affects many aspects of your finances. Bankruptcy is a public record, similar to a judgment, which stays on your credit report for ten years. In many cases, a debtor has better alternatives. However, in certain situations, bankruptcy might be the best option.
One important consideration is your credit. If your credit rating is good, filing bankruptcy will have a long-term, negative impact that might not be worth the relief you get now. On the other hand, if you already have terrible credit, bankruptcy may not hurt your credit and may actually improve it. This could be true, for example, if you have judgments or foreclosure on your credit. Once your bankruptcy is discharged, these items are eliminated from your credit report.
If your bills have piled up on you, and you have overwhelming debt with no way of ever repaying it, bankruptcy may be your best option. If you are unable to satisfy your creditors, they might sue you. Obtaining judgments allows creditors to take aggressive collection actions, such as garnishing your wages and levying your bank account.
When your bank account is levied, your creditors provide the bank with a court order requiring your bank to empty every account with your name on it, up to the balance stated in the court order. This occurs with no previous notice to you. Your bank may charge a fee, putting your account in the negative. You may not find out until days later, after several overdrafts have occurred. This could cost you hundreds of dollars plus make you late paying important bills such as a house or car payment.
If you have a recent foreclosure, you may believe you have nothing more to fear from the mortgage company. This is not necessarily true. If the mortgage company sells the house for less than what you owed, the company could file for a deficiency judgment against you and take the same aggressive collection actions as other judgment creditors.
Bankruptcy puts an end to all debt collection activities against you, including phone calls. This relief begins the day you file. At this point, bankruptcy may be the only way you can get on your feet again.
If you have a sudden loss of income, your creditors may be willing to work with you if you can document it. You may also be able to get a credit counseling agency to negotiate with the creditors to reduce balances and payments and prevent lawsuits. If you have explored all your options and determined lawsuits are inevitable, bankruptcy might be the only way to prevent them.
Before you decide you are ready to file, be sure to have a plan to prevent the same circumstances from creeping up on you after bankruptcy. If medical bills caused it, consider upgrading your insurance, or look for inexpensive medical insurance. If necessary, consider finding another job that offers benefits. If poor spending habits caused it, develop a plan to budget wisely.
Learn to live within your means. Bad credit after bankruptcy is almost impossible to overcome. You must take drastic measures, if necessary, to reduce the risk that you will accumulate debt again. You cannot file for bankruptcy again for six years, so you could be much worse off if you get into debt again.
Filing bankruptcy is a drastic step that should only be taken when you have no other options for getting back on your feet, and only after you have taken steps to keep yourself from getting into the same position again. Bankruptcy is a serious matter not to be taken lightly. If, after careful consideration, you have determined that bankruptcy is the only way out, and that it will be beneficial in the long-run, it may very well be the best option for you.