In the FinancialVerse, your ability to manage money may fail, and you may run out of cash and be unable to pay your bills and living costs. This can occur because of your negligence or as a result of an event you cannot control. You may lose your job and be unable to pay your bills. You may become sick and disabled and deplete your savings. These possible events will cause you to make choices and shape your journey through the FinancialVerse to live a reasonable lifestyle on what income you have.
You may also take on more financial responsibilities than you can handle, or one of the key risks—like the costs of caring for a sick relative—may force you off your path or overwhelm you. As a result you may be unable to earn the cash income you need to support the lifestyle you want.
There are ways to get out from under such a crushing and unexpected financial burden, but the release from these obligations comes at a cost. Typically, each state has laws that allow individuals who have been unable to manage their financial affairs to get a fresh start or, as the laws state, to reorganize their finances. These options are typically written into law at the state and national levels.
Most often, the quickest failure correction or reset button that is hit by persons in financial trouble to provide relief is reorganizing the individual’s financial situation by filing for court-ordered bankruptcy protection. Bankruptcy protection allows you time to get your affairs in order, negotiate with creditors, and try to work out a plan that will let you reset your financial life.
There are two common types of individual bankruptcy protection: Chapter 7 and 13 bankruptcy filings. Should you need to reset your financial circumstances, you need to understand the ramifications of all options. My advice is to consult a bankruptcy attorney. The attorney can advise you on the steps you need to take and will explain the ramifications of the bankruptcy filing.
There are costs to file bankruptcy and major implications for you. Here are some considerations:
Filing bankruptcy does not legally discharge certain types of debt. These usually include student loan debt, court-ordered child support obligations, court-ordered alimony, and most tax debts.
Filing bankruptcy can relieve financial stress from bill collectors, help to stabilize your cash flow so you can regroup, and can allow you to get your affairs in better order for the future in a timelier manner.
There are costs to file including those charged by attorneys and the courts.
If the debt being discharged in bankruptcy is secured (e.g., a car loan or mortgage/home equity), the lender can take possession of the asset—the car or house—to sell the asset to help pay back the loan.
Lastly, having a bankruptcy filing will stay on your credit record and impact your credit score - seven years for a Chapter 13 filing and ten years for a Chapter 7 usually having a negative impact on your ability to get credit in the future if you need it. You should consult the websites of the three main credit-reporting agencies for how each handles a bankruptcy filing.
Overall, hitting the reset button with a bankruptcy filing should only be done after careful thought, negotiations with your creditors, and consultation with a bankruptcy attorney. Filing can have lasting impacts on your ability to access credit at times when you may need it most as you restart your financial life, including purchasing or renting a residence, buying or leasing a car, or obtaining financing for another major purchase.
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