Bankruptcy gets an unfair rap in our culture. The connotations that people make when they first think of bankruptcy are often negative ones. People think of financial ruin, a business closing its doors or credit that is forever tarnished.
But the truth is that bankruptcy can be very positive to filers and it isn't as negative as some believe it to be. There are many reasons why people choose to file bankruptcy, some of which are the very reasons that people are scared of bankruptcy to begin with.
It's true that no one starts a business venture or begins their career with the goal of filing for bankruptcy, but it has proven to be a solution to a number of financial problems that businesses and individuals face.
Before we look at why bankruptcy is a way out of financial turmoil for some people, let's take a look at a few of the most common reasons that people are put in the position where they look toward bankruptcy as a solution.
Common Causes of Personal Bankruptcy
Medical Bills: Medical expenses accumulate quickly when someone gets sick or injured. Injury and illness can limit a person's income dramatically, and the cost of healthcare, especially for those that are suffering the most, can quickly drain a person's financial resources and put them into massive debt. Even those who have insurance face these problems.
Job Loss: Without a steady stream of income, savings dry up quickly and people are forced to rely on credit to pay bills. Losing a job can put a family in serious financial hardship, especially if the person who loses their job was the primary earner of the family.
Credit Card Debt: Americans rely heavily on credit to make big purchases. Sometimes it is a matter of poor planning that leads to a backlog of payments, but it is often unforeseen circumstances like injury, illness or job loss that make paying credit card debt a challenge for the debtor.
Divorce: People don't realize the financial repercussions of a divorce until they witness it first-hand. In the wake of divorce, a person will see their property and assets divided. They might also need to make child support payments.
Common Causes of Business Bankruptcy
Unforeseen Market Circumstances: When there is a downturn in a market, businesses that once enjoyed healthy profit margins are put into the red. In this situation, businesses become victims of the financial climate surrounding their industry and quickly accumulate debt.
Difficulty Paying Loans: This can be easily tied into unforeseen circumstances, since it is often the case that when times are good, a business can be on track to pay back any loans that they have taken out. If that business then sees a change in profits, those loan payments go from being manageable to being insurmountable.
Poor Management: While many businesses are victims of circumstance, there are certainly examples of businesses that simply did not properly plan out their expenses or vastly overrated their potential income.
When Bankruptcy Becomes the Solution
For individuals, bankruptcy is often a way to protect assets while satisfying some of the debts that are still owed to creditors. Depending on the terms of the arrangements made with creditors, those who file for bankruptcy can hold on to some of their biggest assets, such as houses or vehicles. If debt has become unbearable for a person, bankruptcy can prove to be a way to get by without losing all of one's assets.
For people whose debts are more than half of their annual income, or for those whose debt would take several years to pay off, bankruptcy can be a way to manage the money owed to creditors.
For businesses, bankruptcy can actually be a method of keeping the doors open. Chapter 11 bankruptcy is often the preferred course of action for business that want to restructure their organization and debts to continue their operations. For businesses that want to liquidate their business, Chapter 7 bankruptcy is typically the path forward.
It is also important to note that not everyone has the option of filing for bankruptcy. If you earn a certain level of income, you may not be eligible to file for Chapter 7 bankruptcy; however, the Chapter 13 bankruptcy may be the best option to reorganize your debt. There are also certain debts that typically won't be discharged by bankruptcy, such as student loans.
The Type of Bankruptcy You Choose Matters
The other important consideration that people must examine when they face insurmountable debt is which type of bankruptcy would be best for their needs. For individuals, the choice can have big implications for the assets you can hold on to after you file for bankruptcy.
People filing for Chapter 7 might be doing so because it targets particular debts owed, such as credit card debt or debt owed due to overwhelming medical bills. In a Chapter 7 bankruptcy, most debts will end up being forgiven; however, some assets may not be fully exempt. You should hire Fesenmyer Cousino Weinzimmer to ensure your assets are protected through the Chapter 7 bankruptcy process,. Chapter 7 is the most common form of bankruptcy.
Filing for Chapter 13 is often utilized when someone has fallen behind on secured debt, such as a house or a car, and needs to restructure the debt through a repayment plan.. It is the desired choice for those who need to take the control back from their creditors and repay the debt over a designated period of time through a court-ordered payment plan. People who file Chapter 13 still receive the benefit of a bankruptcy discharge of any dischargeable debt not repaid through the plan as most plans will designate a certain percentage to the general unsecured liabilities such as credit cards and medical bills.
Bankruptcy doesn't deserve its bad reputation. It is a viable solution for those whose debt has become crippling, personally and financially. When the bankruptcy process is done properly, a person or a business can be given a fresh start. It is not the best path forward for everyone; however, for so many people who have incurred significant amounts of debt through unforeseen circumstances, it can be a wise decision.
So, the next time you hear about someone's filing for bankruptcy, remember that it is not necessarily a bad thing. It could be the solution to the debt problems they are facing.