Bankruptcy Guide

Bankruptcy is an option pursued by all classes of society, from the most wealthy to the fully impoverished because of its versatility. However, within its versatility there is a great risk present for those who do not take the time to properly plan and understand the implications of what it is that they are pursuing. It is because of this risk that guides like this exist.

By the end of this segment, you will have a basic understanding of what bankruptcy is, how it works, its benefits, detriments, and some strategies for pursuing it. That being said, remember to keep in mind that all financial situations are unique, and that something as complicated as bankruptcy should always be pursued under the advice of an experienced professional, such as a debt counselor.

  • What is Bankruptcy?
  • Declaring Bankruptcy is the process an individual or business takes when they wish to officially default on their debts, due to insolvency. This means that they are formally stating that they do not have any funds or assets available to put towards paying off a debt, and that they are therefore no longer able to make a reasonable effort towards repaying their obligations.

    Upon doing so, depending on the type of bankruptcy that the individual applies for, the borrower’s debts will either be renegotiated through arbitration, or the borrower’s assets will be placed under the control of a trustee, who will take it upon themselves to liquidate all non-essential assets so as to create ‘disposable income’, which will then be applied towards the repayment of as much of the debt as is possible. Upon having done so, the borrower will be pardoned of their debt, but will not likely have access to credit again for a period of time.

  • What are the Benefits of Bankruptcy?
  • The main benefit of Bankruptcy for a borrower is that they are able to find relief from an overwhelming debt burden. Be this through renegotiating or full insolvency, Bankruptcy will reduce or completely dissipate debts, and thus grant an individual the opportunity to start again from scratch. From a lender’s perspective, Bankruptcy allows them to collect at least a portion of a debt that may have before gone completely into default.

    While this isn’t an ideal situation for the lender (hence why many will actively try and foreclose on a loan before a borrower can file for Bankruptcy Protection), the end result is that both the borrower and the lender are able to make the best of a bad situation, and create the most value possible out of the failing loan.

  • What is the Down Side of Bankruptcy?
  • While the benefits of being about to remove oneself from overwhelming debt are extremely appealing, it is important to remember that there are some very serious implications to declaring bankruptcy. Over the long term, declaring bankruptcy very near destroys a borrower’s ability to access credit at a reasonable rate because of the risks they now present to lenders. Over the short term, there are some very specific down-sides associated with the control of a borrower’s assets and funds.

    In the event of a negotiated settlement (ie. CH 13), a borrower will need to prove that they are being completely overwhelmed by existing obligations, and may need to post additional collateral, or accept more stringent terms in order to keep control of their accounts. However, in the event of a full Bankruptcy (ie. CH 7) a borrower will essentially take on the role of a child of the state, in that the trustee will have control of their assets, and will be responsible for liquidating as much as possible in order to facilitate the repayment of as much debt as is possible.

    This is a very restrictive situation for a borrower to be in, because it means that they are no longer in control of their own finances or assets for a fairly long period of time. What’s more, individuals in this situation will need to deal with the fact that they are going to need to make some very serious cut-backs on their quality of life, in order to accommodate the bankruptcy process itself.

  • Who Benefits Most from Bankruptcy?
  • In filing for bankruptcy, it is important to make sure that the benefits of having debts forgiven today, will outweigh the detriments of losing control of assets and access to the debt in the future. As with any major financial undertaking, it is important to look at Bankruptcy as an investment in the future. By clearing up debts today, do we gain access to better opportunities for tomorrow? Will we be able to maintain an acceptable standard of living without debt in the future?

    These questions cannot be definitely answered, but they should still be addressed. From looking at this sort of today vs tomorrow framework, we can then realize that the person who benefits most from Bankruptcy is the one that is overwhelmed with debt to the point at which they will not be able to continue making payments for much longer. From this point, it is important to note that it is not necessarily the borrower that is already overwhelmed and missing payments that would benefit the most by defaulting.

    In the event that an individual is already missing payments and showing obvious signs of struggle against debt loads, lenders will have already begun steps to foreclose on the loans, and force the borrower into an even greater state of insolvency. This is because the borrower will not yet have access to the benefits of bankruptcy protection, and will not have essential assets and non-disposable income under protection.

    For this reason, the greatest amount of benefit from the bankruptcy process is realized by an individual that initiates the re-negotiation process just as they are entering a state of insolvency, but before they have demonstrated obvious signs of a tendency towards bankruptcy. By making the application for Chapter 13 before lenders have reason to foreclose on collateral assets, the borrower is able to enter a period of renegotiating that might leave them off in a better position than before, while still allowing them to maintain control of their assets.

    Should worst come to worst, the borrower can than progress the application to a state of a Chapter 7 filing, which would still allow them to maintain control of non-disposable incomes and essential assets. This can mean the difference between being foreclosed upon and kicked out into the streets, and being able to keep a reasonable quality of life in light of the default.

  • What is the Bankruptcy Process?
  • Bankruptcy follows a process of filing, negotiation, liquidation, and release. During the filing process, an applicant submits to the state court a document containing a list of their current financial position, as well as any contracts or tax obligations that can be used to illustrate their overburdened situation.

    From here, a certificate proving that debt counseling has been obtained might be required if the debt revolves around consumer obligations. Lastly, there are a number of fees that must be submitted with the filing to pay for the review of the application itself. That being said, these fees may be waived if the applicant is under the residing state’s poverty line.

    Upon completing the filing, the account will generally go under an umbrella of ‘bankruptcy protection’, which prevents lenders from immediately foreclosing upon debts. From here, the courts will review the application as either a Chapter 13 request for re-negotiation, or a Chapter 7 filing for release of obligation.

    Under Chapter 13, the borrower’s debts are reviewed against their financial position, and a 3-5 year repayment plan is usually assigned, with new terms to accommodate the repayment of as much of the obligations as possible, in accordance to priority. From here, the borrower does still maintain the option to ‘reaffirm’ the validity of a debt, even if the court declares it to be of lower priority, so long as the borrower still maintains their court-prescribed commitment to the repayment plan itself.

    Under a Chapter 7 filing, the court will proceed to appoint a state trustee that will oversee the usage of the borrower’s assets to make sure that they are applied towards the repayment of as much of the obligations as possible before obtaining a release. The trustee will take it upon themselves to liquidate non-essential assets, and to apply liens against essential assets so that they can be either used as collateral, or to prevent the borrower from attempting to sell the assets out from under the lenders.

    From there, the trustee will determine at what point the obligations have been met to the fullest capabilities of the borrower, and release the debt. Upon reaching this point, the borrower will very likely be left without disposable income or non-essential assets. That being said, they will be released from their debt obligations, and will be in a position to rebuild.

  • How Do I Effectively Declare Bankruptcy?
  • The most important thing to do when engaging bankruptcy is to make sure that an inclusive plan is made in advance. As with all aspects of credit, it is always best to approach Bankruptcy proactively, and to attempt at all points in time to resolve the obligations with a little difficulty as possible. Obtaining consultation is always a good idea, because an experienced professional might be able to help mitigate the need for a filing all together.

    From there, attempting private renegotiating with the lender itself is always an option, because they would much rather not deal with the hassles of bankruptcy themselves. From there, it is a good idea to try and file for Chapter 13 first, so as to hopefully maintain control over your own assets. That being said, make sure that an application is fully completed and submitted in a single encounter, so that lenders do not have an opportunity to foreclose upon debt immediately before the application is actually submitted. Discretion can mean the difference between keeping or losing a piece of collateral, and sacrificing a major aspect of your standard of living.

  • What Happens After Declaring Bankruptcy?
  • Upon declaring Bankruptcy of any class, it is important to make efforts to cooperate with all parties involved. Lenders, trustees, and the state will all begin very aggressively working towards resolving the obligations in a way that compensates the lenders to the fullest extent possible. That being said, a borrower’s willingness to take initiatives towards repaying these debts and reducing their standard of living in the hopes of repaying the debts will result in a much more streamlined process.

    By simplifying the process, a borrower can possibly reduce the terms of their obligation, and reduce the overall time-frame for which they will be under the guidance of the trustee. This is best accomplished by making efforts to relocate, continue working, reducing living expenses, and reaffirming debts where possible, so as to show an effort to the state.