After years of struggle with debt, you have come to a period in your life when you realize you are unable to fulfill your obligations anymore. You look at debt consolidation or counselling but conclude that neither of these will provide you with the relief that you need. The next step after these would be bankruptcy. While this option can instill fear and reluctance in people, below are ways it can help you financially.
1. Your dischargeable debts are paid off
When you apply for chapter 7 bankruptcy, you are able to pay off your dischargeable debts. A trustee is given the mandate to sell property that is not protected by any bankruptcy exemptions to pay off your creditors. Non-dischargeable debts that are not guaranteed by any collateral are eliminated. This gives you a chance to start over and have a second chance in being financially healthy. In chapter 13 bankruptcy, you receive a repayment plan based on your budget that will help you clear the debt in a given time frame. Also, your dischargeable debt ceases to accrue more interest from the time you file. The law allows you to pay only the amount owed on the day of application for bankruptcy.
2. Some assets are protected
Filing for bankruptcy will protect you from several losses. According to chapter 7 bankruptcy, debtors are exempted from the liquidation of property such as houses, furniture, clothing, vehicles, and land. These exemptions, however, vary from one jurisdiction to another so you need to determine the laws applicable to you. Bankruptcy exemptions mean some of your property is protected from liquidation. This gives you financial relief from losing your valuable possessions so you are not left with nothing.
3. Improved credit score rating
While bankruptcy may hurt your credit score in the short term, you still have a chance of having an acceptable credit score rating in the not-so-distant future. This is because bankruptcy eliminates your debt and, depending on the chapter you filed under, can help you repay the debt using a repayment plan. These debts will be reported as ‘included in your bankruptcy’ rather than ‘delinquent’ in your credit report which can help boost your rating. Some of the main factors that determine your credit score include your payment history and the amount of debt you owe. Bankruptcy gives you a new start which enables you to rebuild your payment history, therefore improving your credit score.
4. Prevent creditors’ collection efforts
When you file for bankruptcy, you get to benefit from an ‘automatic stay’. This means that you are protected from your creditors’ collection efforts. Bankruptcy laws prohibit creditors from contacting debtors who have filed for bankruptcy. You will, therefore, have peace of mind as there will be no phone calls, letters, or any other form of harassment threatening action over your unpaid debts. When you apply for bankruptcy, the creditor’s legal claims against you will be stopped. These include foreclosure, lawsuits, and garnishments. There are however some legal actions that may not be exempt from the automatic stay. These include criminal proceedings, child support, and student loans.
5. Your crisis may cost less than you think
There are several ways to solve your debt problems. These methods vary depending on your financial situation. Some of these methods include debt consolidation where you combine your debt and pay it to a single creditor or debt management where an agency creates a debt management plan to help you pay your debt. These methods are expensive and might put you into more debt. Bankruptcy can cost less and you are likely to be relieved of more losses. Unlike the other methods, you will not have to pay all the amount owed in full.