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Deciding When to File for Bankruptcy

Because of bankruptcy’s major effects, it is not recommended as the first recourse for individuals and businesses in financial difficulties. But how do you know you’ve reached rock bottom and the only way out is to file for bankruptcy?

Our article has questions that people contemplating on filing for bankruptcy should ask themselves before deciding.

A bankruptcy has major effects on a person’s credit record and so it is often recommended that it must only be resorted to when alternatives fail. A Chapter 7 bankruptcy will go down on a person’s credit report for ten years; Chapter 13, seven years after the filing. Such record will make obtaining credit lines difficult and can result to higher interest rates when making mortgage purchases or applying for credit cards. Financing a new home or renting an apartment would require more assurance than usual that one can pay the debt.

Ways to Avert Bankruptcy

And so it is best for a person contemplating whether or not to file for bankruptcy to consider whether there are other ways he can settle his debts without filing for bankruptcy. For example, does he have some assets that he can dispose of to pay debts? Can he borrow money from friends and relatives to take care of debts that accrue high interest rates? Can he tap equity from major properties like his home to pay credit that accrues high monthly interest rates? Maybe he can ask help from national consumer debt services or learn financial management strategies? Get debt consolidation help from www.consumercredit.com or credit counseling from www.nfcc.org. Corporations might sell shares or resort to other ways to raise capital.

Asking creditors to waive late charges, grant longer pay period, and lower minimum periodic payments could avoid bankruptcy that is prejudicial not only to the debtor but also to creditors. Distribution to creditors under bankruptcy is done according to priority and there’s no guarantee that the debtor will have enough to pay all creditors. If the amount of collectible is small, it might not even be worth the trouble of going through the legal maze. For a debtor under Chapter 7, he should be ready to give up assets that will be sold to pay out his debts. Under Chapter 13, he might be able to retain some of his assets, but he would have to agree to a scheme that would have him pay debts for several years.

Deciding on Filing for Bankruptcy

If the suggested remedies are not enough and the creditors are closing in, then, it could be time to run to the court to put order on how assets will be sold, creditors paid or debt payment arranged. Bankruptcy pulls down what is called “automatic stay” that freezes all lawsuits against the debtor and his estate to protect the assets from being pulled back by creditors, fraudulently shelved by the creditors, or -- for corporations -- possibly allow the debtor to reorganize.

Once it is decided that there is no other option but to file for bankruptcy, consult an online help or find a bankruptcy attorney to determine what bankruptcy is best suited for an individual’s or a business’ situation. Bankruptcies available for businesses and individuals are provided under Chapter 7, 11, 12 and 13.

For an online resource on bankruptcy, visit www.wiwb.uscourts.gov. For bankruptcy-related information, including a link to a lawyer directory, visit www.nolo.com.

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