Understanding Bankruptcy

Declaring bankruptcy is not something to be taken lightly. It should in fact be the last resort after exhausting every other option of debt relief.

Is Bankruptcy Right for Me?

The cost of living has risen so much that it’s no longer a surprise to know that many people are living in debt or living “above their means”.   Drowning in debt isn’t exclusive to low-income families and individuals or even people who stay current with their monthly bills. You don’t even have to be an extravagant spender to be drowning in debt.

When you’re living in debt, unexpected financial situations such as diseases, job loss, death of a contributing family member and so forth can aggravate the situation.  In many cases, I’ve found many low-income families are one hardship away from complete financial ruin.  Unfortunately in many of these cases, debt and interest rates will continue to rise and creditors will continue putting so much pressure on you that you can’t think of other alternatives and depression becomes the new normal.

Depending on your individual circumstance and your long-term goals, you could resort to bankruptcy. However, there are advantages and disadvantages of declaring bankruptcy and it might be a good idea to consult a lawyer before putting taking steps to file for bankruptcy.

Understanding Bankruptcy

Bankruptcy is the declaration of inability to pay back creditors by a delinquent borrower.  It is a legal way of telling the lender that your current circumstance makes it impossible for you to pay back the debt and you don’t expect your situation to improve any time soon.

Types of Bankruptcy

  • Chapter 7 – This is an option where the assets you declare are “exempt” from repossession. It is an option for people with low income, low assets and high debt.  Debts like medical bills and credit cards are erased so you can pay your other debts like mortgage and auto payments.
  • Chapter 13 – This is for people who only want an extension of their repayment period because their current circumstances make it hard for them to repay. The court then comes in to set up a plan of repayment.  An example is people who are afraid of their homes being thrust into foreclosure.

The Bankruptcy Process

To protect consumers who are not knowledgeable of the long-term implications of their actions, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, has put in place rules and regulations overseeing the process.

  • Steps 1 – Secure a lawyer who will give you legal advice and thoroughly explain the process to you. Typically you will pay for this service but there is also legal aid available for those who cannot afford court representation.
  • Step 2 – Attend your first mandatory class. The act demands that you obtain a counseling certificate as proof that you have understood the process.
  • Step 3 – File for Bankruptcy. This is normally a court case where your financial situation, assets, debts and all will be reviewed and you can negotiate on the debts to be paid, debts to erase and the debt repayment period.
  • Step 4 – Take a second class. After filing for bankruptcy you will be required to get an education certificate. This second class is to teach you financial management, how to use credit, and budgeting.

Unforgivable Debts – There are some debts that can’t be forgiven, including:

  • Taxes
  • Child support
  • Criminal fines
  • Alimony
  • Court restitution orders
  • Student loans

Advantages of Bankruptcy

  • You may be allowed to keep personal assets like your home, car and others.
  • You can regain your financial health and peace of mind.
  • Your creditors will not be allowed to contact you or stress you about repayment.
  • You will be freed from most of your debts.


  • It will damage your credit history and give you a bad reputation with employers, utility companies and lenders.
  • Your finances will be publicly handled and scrutinized.
  • There are certain debts that are unforgivable.
  • Interest rates may increase for some items that you may buy with credit in the future.
  • It will take time for the bankruptcy to be erased from your credit report.

Bankruptcy is not an easy solution, and the process is complex. However, if it’s all that’s required for you to declare yourself free from a financial past barred with nightmares, employ the services of an attorney to guide you through the process.

Take the Next Step:

If you’re considering filing for bankruptcy…consult a lawyer first to understand your options and how to come out ahead.  Click HERE.