Table of Contents
- What is Bankruptcy?
- Consequences of Filing for a Bankruptcy
- Alternatives to Filing for a Bankruptcy
- Bankruptcy Can Be Tough
You’ve probably heard of bankruptcy. The word gets thrown around so often, and it sounds like the kind of horror scenario you need to avoid in the business world. However, have you ever wondered what bankruptcy actually means and whether it should be an option for you?
Our guide will give you all the information you need about bankruptcy.
What is Bankruptcy?
Bankruptcy refers to a situation a person or a company faces when they are no longer able to repay their debts. At this point, the debtor will file for bankruptcy. If their filing is accepted, their debts can be forgiven and they will be able to start all over.
When you are struggling to pay your debts, there are different ways you can file for bankruptcy. The bankruptcy overview will go through the most common ones, which are the Chapter 7 bankruptcy, Chapter 11 bankruptcy, and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy
Filing for a Chapter 7 bankruptcy means you will need to liquidate your assets to repay the outstanding debts, which will be decided by the bankruptcy trustee. There are some assets that are exempt from this, such as cars and household items. Once the bankruptcy gets discharged, your debts will be eliminated.
Under chapter 7, you can lose control over your business as your assets are stripped by the decisions of the bankruptcy trustee.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy involves a reorganization of your assets and an overall attempt to keep a business afloat. This bankruptcy law mostly works for businesses, not individuals. Instead of losing control over your company, you get to
When filing Chapter 11, your business can continue to operate, but you are not allowed to make decisions such as selling assets without the court’s agreement. During the bankruptcy filing, you can make reorganization plans which will assist you in preventing another debt-ridden scenario. This can come from deciding to scale back operations, closing down a branch, and more.
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy includes a longer repayment period that may not require the sale of assets to eliminate debts now. Instead, debtors can pay their creditors monthly for a period of three to five years. This type of bankruptcy will usually be more applicable for people who have an income.
A Chapter 13 bankruptcy typically works for people whose income is too high to qualify for a Chapter 7.
Consequences of Filing for a Bankruptcy
Bankruptcy will seriously impact different areas of your life. From your finances to your personal assets, these are a few consequences of filing for bankruptcy.
Lower Credit Score
One of the consequences of bankruptcy is that it lands a blow to your credit score. Your credit score represents your overall riskiness as a debtor, so lenders will refer to it to assess whether they will want to provide you with loans. When you have declared bankruptcy, your credit score suffers as a result, and lenders are less likely to be willing to engage with you. This is because the chance of you defaulting on the loan is seen as very high.
This lower credit score will, regrettably, affect your chances of applying for a credit card or a mortgage. When you do get accepted for these plans, they may involve much higher interest rates than usual. This is because your lenders will attempt to offset the risk by demanding higher returns.
Loss of Property
Another impact of bankruptcy is the loss of property. Going through bankruptcy proceedings will most likely involve some liquidation of assets so that you can repay your creditors.
Alternatives to Filing for a Bankruptcy
If you’ve gone this far and decided you would want to avoid filing for bankruptcy at all costs, you are probably not alone. Bankruptcy takes a real hit to your reputation and your finances, and it will take a long time to recover.
On the bright side, there are several ways you can avoid bankruptcy, even when you are struggling.
1. Consult a Credit Counselor or a Debt Management Plan
If you have an amounting credit card debt, or simply need help with managing your finances to pay people back on time, consulting a credit counselor or going through a debt management plan will help you stay on track.
They will be around to assist you in properly planning out your repayment plans so you can avoid having to file for bankruptcy.
2. Negotiate an Extended Repayment Plan
You can always attempt to negotiate with your creditors regarding your repayment plan. Express to them your concerns about not being able to meet the current deadlines, and request if it is possible to adopt a more flexible payment schedule.
Some of your creditors won’t have much to gain from you defaulting on your loans, so they may be more willing to help.
3. Attain a Debt Consolidation Loan
A debt consolidation loan involves you taking out a new loan to pay off your current loans. This means that, instead of having various different debts to different creditors, you have one larger loan. This may help you organize your repayment efforts better.
It also means that you operate under one interest rate and one payment schedule. If you choose the right ones with lower interest rates, you may even have to pay less than before.
Bankruptcy Can Be Tough
Overall, it needs no repeating that bankruptcy is not a situation anyone would want to put themselves in. However, sometimes businesses don’t go well, and sometimes people simply cannot stay afloat in the midst of their debt. There are different ways you can file for bankruptcy to suit your needs in these cases.
Otherwise, you can go for one of the alternative options, such as using a debt consolidation loan or negotiating with your creditors. While struggling financially is a tough situation to be in, the way you respond to it will determine your future success.
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