Reasons to File Bankruptcy

Choosing to file for bankruptcy is a last resort in the fight against debt. Bankruptcy may be able to help you by either clearing your debts entirely, or making the debts you have more manageable. In the process, however, your credit rating will be decimated and you may be forced to live on a very limited income while paying any payment plans assigned to you by the court. Consider all other potential options before filing for bankruptcy.

The Facts

Bankruptcy is a legal process that provides a way for debtors who have accrued too much debt to either discharge the debt or enter into a carefully restructured repayment plan to absolve their obligations. The two types of personal bankruptcy available to consumers are Chapter 7 bankruptcy and Chapter 13 bankruptcy. A bankruptcy will appear on your credit report as soon as you file and will remain there for seven to ten years.

Credit Card Debt

Some consumers discover that, due to high interest rates, they will be unable to pay off their credit card debt. In the event that the credit card debt has already been charged off, collection agencies may add extra fees to the original amount. This puts the consumer at an even greater disadvantage. Each state has a statute of limitations (SOL) regulating how long a debt can legally be collected upon. If you have defaulted credit card debt and the SOL has not expired, you may be at risk of being sued for the balance. Losing the lawsuit could result in your wages being garnished. Consumers in this situation may consider bankruptcy a viable alternative to facing a potential lawsuit and wage garnishment.

Medical Debt

Unlike credit card debts, medical debts are typically accrued without fault. Nevertheless, you are still responsible for payment. Given the expensive cost of medical care, you can easily find yourself responsible for debts that far surpass even the highest credit card limit. If the idea of making payments on a medical debt for 20 years or longer does not appeal to you, bankruptcy is an alternative. Medical debt is considered unsecured debt and as such faces the same legal collection restrictions as defaulted credit card debt.

Foreclosure

For consumers facing foreclosure, bankruptcy can sometimes help. Once an individual files for bankruptcy, the court will issue a "stay." A stay prevents a lender from moving forward with foreclosure proceedings. Depending on the type of bankruptcy you file, a stay may only be temporary. If you have equity in your home, however, the bankruptcy court may put a stop to the foreclosure to give you time to sell your home. The extra equity will be used to pay creditors, and the mortgage lender will be paid in full, thus preventing a foreclosure notation on your credit report.

Warning

Certain debts cannot be discharged via bankruptcy and should not be deciding factors in whether or not you should file. These debts include, but are not limited to student loans, taxes, child support, and alimony obligations. If you made charges on a credit card within 60 days of filing for bankruptcy, the creditor may be able to argue that you made the purchases knowing you would soon be able to discharge the debt. If this occurs, you may be held liable for any purchases made with credit for two months prior to your bankruptcy.

References

• State Statute of Limitations on Debt Collection
• Foreclosure and Bankruptcy
• Debts You Cannot Discharge in Bankruptcy