Any person during their lifetime due to unforeseen circumstances such as lost of employment, high medical expenses, or major repairs on a house can fall into economic hardship. When a person does not have sufficient income to cover both living expenses and debt payment they face a tricky situation. An alternative solution for people in similar circumstances is to file for bankruptcy. There are two bankruptcy chapters that individuals can file which are chapter 7 and chapter 13 (Irby, 2017). The purpose of this paper is to evaluate the factors to consider prior to filing a personal bankruptcy.
When deciding to declare bankruptcy a person must weight and analyze all options available and file bankruptcy only as a last resort. Declaring bankruptcy has a major con which is that people who file for bankruptcy lose access to credit for a period of seven to ten years. A person that studied accounting or finance should not file for bankruptcy because doing so taints a person’s record as an employee candidate. An alternative that should be analyzed prior to bankruptcy is reorganizing your debt by consolidating. If the person only has one major account that is causing financial hardship going into default on that debt is a better option than bankruptcy.
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Once a person has made the decision to file for bankruptcy the individual has to choose between chapter 7 and chapter 13 filing. A chapter 7 bankruptcy wipes out all the debt of a person, but personal assets except for the primary home and car can be confiscated in the process. In a chapter 13 bankruptcy the filer obtains the benefit of erasing a portion of the total debt. The person after filing is responsible for monthly payment plan for a period of three to five years to pay off the portion of the debt that the judge decides he is responsible for. To file for bankruptcy requires the assistance of a lawyer. Choosing a good lawyer is important and these types of cases can cost between $1,500 to $3,000 for a chapter 7 filing and $3,000 to $4,000 for chapter 13 (Bloomfield, 2017). The lawyer is responsible for negotiating the lowest payment possible in a chapter 13 filing and protecting the highest amounts of assets.
On many occasions, the debt obligations of the person filing for bankruptcy are backed by a person that co-signed for a loan. In a bankruptcy case, the co-signer is involved in the process because if the courts determine he can afford to pay for the loan the debt responsibility is transferred to that person. Along with the first home and automobile other assets of the filer can be salvaged by the lawyer. Assets associated with retirement money such as 401k are protected in a bankruptcy. Due to the value of a home or vehicle protecting these two assets is a major motivator for filing for bankruptcy. A person that faces the threat of wage garnishment due to pending lawsuit to recover debt should consider the option of filing for bankruptcy seriously.
Choosing to file for bankruptcy is not an easy decision and can be emotionally tough. “Someone who believes that filing for bankruptcy is unethical or feels that it represents a personal failure might need time to explore all other options” (O’Neill, 2017). One should not file for bankruptcy for defaulting on a minor debt obligation such as a credit card because the benefits of filing outweigh the costs. Choosing to file for bankruptcy can help a person obtain financial recovery by eliminating or reducing total debt. In the long-term people can obtain access to credit again after filing for bankruptcy.
