The Benefits of Bankruptcy and When to File for It

By Daisy Rogozinsky
/
June 28, 2022

Filing for bankruptcy is an option worth considering for people who are drowning in debts they cannot repay, dealing with a potential foreclosure, and being harassed by bill collectors. However, it is a very serious decision with lasting consequences that should not be taken lightly. 

If you’re thinking of filing for bankruptcy, it’s important to understand its benefits, as well as the signs that might indicate the time is right for you to file. In this article, we’ll outline the main benefits of bankruptcy and give you some suggestions for ways you can determine whether or not this is the appropriate time for you to file.

The Benefits of Bankruptcy

Bankruptcy was created to provide relief to debtors, offering a number of benefits as such. We list some of the most significant ones below. 

  1. Stopping Debt Collection Efforts

When you file for bankruptcy, an automatic stay is put into place that orders creditors to stop collection efforts. If you are currently suffering from the stress of aggressive debt collectors calling and sending ceaseless letters, bankruptcy can restore your peace of mind by making them stop their activities.

  1. Getting Rid of Debts

One of the most desired benefits of bankruptcy for many people is the discharge of their debts. Exactly what happens with your debts will depend on the type of bankruptcy you file. In Chapter 7 bankruptcy, all eligible unsecured debts will be discharged and your slate wiped clean, giving you a feeling of a fresh start either by wiping out your debt entirely or leaving you with a much more manageable set of loans. In Chapter 13 bankruptcy, you will first be required to pay off as many debts as you can with a payment plan, but after your repayment period, any remaining debt will be discharged. 

  1. Prevent Repossession, Foreclosure, Wage Garnishment, and Utility Shutoffs

There are a number of things that come along with being insolvent and buried in debt that can cause significant strife and stress. These include:

  • Repossession - When the lender takes back your property after you default on your debt 
  • Foreclosure - When a lender sells your property to satisfy your loan debt
  • Wage garnishment - When creditors take money from your paycheck
  • Utility shutoffs - When utility companies shut off utilities such as your electricity and water because you are behind in paying your bills

Thankfully, the automatic stay triggered by bankruptcy proceedings stops mortgage foreclosure, property repossession, wage garnishment, and utility shutoffs. This gives you the time and relief you need to catch up on payments and protect your property from repossession in the meantime. 

When to File for Bankruptcy

All of the benefits of bankruptcy listed above may sound appealing enough that it makes you want to rush to file for bankruptcy as soon as possible. However, even if bankruptcy is a good choice for you, it may not necessarily be the best time to do so yet. Below, we share some factors that can indicate that this isn’t yet a good time to file for bankruptcy. If these are true for you, it may be better for you to wait until most or all of them no longer apply.

1. When You Can Afford to Pay Your Debts

Bankruptcy is a process created for people who do not have the ability to pay their debts. If you can afford to pay some of your debts, it is better to do so without initiating bankruptcy proceedings. This is because bankruptcy can have significant long-term consequences such as seriously damaging your credit score and raising your insurance premiums. 

2. When You Can Negotiate With Your Creditors

Before you decide to file for bankruptcy, it is recommended to first try to negotiate with your creditors to see if you can agree on terms that will make it possible for you to pay your debts. In order to avoid the legal hassle and cost of bankruptcy, creditors might agree to repayment schedules that will allow you to get current on your debts or even just reduce your debts. You might also have options for your mortgage as well, such as a repayment plan or forbearance, which will allow you to stop making payments for a period of time. 

3. When Your Income Is Higher Than Usual

If your income is higher than it usually is for whatever reason, it might indicate that you should pause before filing for bankruptcy. This is because people with an income above the state median income for households of their size are not eligible for Chapter 7 bankruptcy. Instead, they may file for Chapter 13 bankruptcy, which requires them to make a payment plan to repay some of their debts. This option is often less desired than Chapter 7. So if you will at some point be able to pass the Chapter 7 means test, it may be better to wait until then to file.

  1. When You Won’t Have Any New Debts Soon

If you expect to have new debts in the near future, it is better to hold off on filing for bankruptcy. This is because the bankruptcy process only discharges debts that you have at the time of filing. If you take on new debt after beginning the bankruptcy process, it will not be wiped out. For this reason, you should wait until you are done taking on new debt before you file for bankruptcy. 

Conclusion

Bankruptcy can offer significant relief and represent a fresh start for many people struggling with debt, aggressive debt collectors, and the threat of foreclosure or repossession. However, it also has some serious consequences, meaning that you shouldn’t file for bankruptcy if the time is not right. But if everything aligns, bankruptcy just might be the saving grace you are looking for.

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