What Are The Pitfalls of Bankruptcy?
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The Pitfalls of Bankruptcy
Bankruptcy can be a frightening word, and not many really understand it until they become either bankrupt themselves, or on the brink of bankruptcy. This article will: describe what bankruptcy actually is; outline some of the risk factors that may lead a person or company to bankruptcy; give some alternative scenarios for individuals facing possible bankruptcy; and, introduce you to what kinds of help Financial Rescue can give when you are in this distressing situation.
What is bankruptcy?
There are 2 types of bankruptcy in the USA: personal and corporate. In fact, under US law both are treated similarly, in that a personal bankruptcy is most commonly actualized through the same legal provisions as for a corporate bankruptcy, namely Chapter 13 of the Bankruptcy Code or, more frequently, Chapter 7. Occasionally, an individual may enter bankruptcy under Chapter 11, but this is rare.
For individuals, bankruptcy occurs when the scale of personal unpaid debt has amassed to such a degree that there is no hope of paying back creditors.
For individuals with a steady income, Chapter 13 is most likely to be invoked since it is a reorganization of one’s finances in which you can keep your property and other assets, and your future earnings are used to pay off your debts with creditors.
Chapter 7 however is more common and is usually a liquidation of all assets (there are some exceptions to this) to pay off your debts. Usually a trustee is appointed to deal with the sale of your assets and the distribution - to creditors - of their proceeds.
Bankruptcy under both Chapter 13 and Chapter 7 is discharged after a lapse of 10 years, but during that time your bankruptcy status will remain a matter of public record and impact, amongst other things, on your creditworthiness for that same length of time, if not more.
In 2005 the US government tried to make it harder to register bankruptcy under Chapter 7 but it is still the most frequently registered bankruptcy resorted to by consumer debtors.
Chapter 11 is a more complex version of Chapter 13 and is invoked very rarely.
Once any of these Chapters are invoked you are discharged from further paying your debts, of course. This is one of the main reasons why individuals opt for bankruptcy, however, it should be noted that, in some cases this is not automatic.
Corporate bankruptcy is really corporate failure, i.e. business collapse, or financial distress are the 2 most common causes of, and reasons for, bankruptcy.
The former is usually when the company’s capital outlay is not covered by forecast income making it impossible to financially survive into the future. In this situation, there is often an entrenched flaw in the business model which inevitably dooms the company to failure. Although, in this scenario, a company can struggle on as long as it can mobilize finance.
The latter is when the company cannot finance its ongoing operations and development so however solid a business model the company has, it will nonetheless eventually slowly slide toward disaster.
The federal law governing bankruptcy in the USA is referred to as the Bankruptcy Code. It has arisen from the Bankruptcy Reform Act of 1978, and various amendments over the years, notably the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. While the law is a Federal law, state law can intervene when property rights are being established in individual personal or corporate cases of bankruptcy.
When you, or your company, are at risk of bankruptcy
As an individual you may face bankruptcy when your debt has overwhelmed your ability to pay it back. Sadly, in the USA many individuals go into debt because they have borrowed from consumer creditors too extensively and eventually find they can’t keep up with payments, either when they lose work or when they have to finance something that is unexpected. Sudden emergency medical bills, for instance, hit households in the US hard. A car accident, appendicitis operation, or a cancer diagnosis needing substantial treatment for instance, can place an unbearable burden onto breadwinners. This of course, can, when they are already managing debt, be the straw which breaks the camel’s back.
A company or organization may face bankruptcy when the environment in which they operate has become problematic. For instance, the industry is contracting and costs increase and sales drop dramatically. Or there can be internal problems that derail a company such as mismanagement and inappropriate skills recruitment.
Bankruptcy or not, the pitfalls and alternatives
Here, in this article, we will focus on personal bankruptcy.
It is wise to think about this very seriously indeed before going into it. As indicated above, declaring bankruptcy can have long lasting repercussions on your life. Bankruptcy lasts for 10 years before it is considered discharged and during that time, you are very unlikely to have recourse to further loans should you need them. You may also be prevented from acting in certain capacities during that time such as taking on the role of company director of a new company.
There are costs connected to bankruptcy, whether or not you hire a professional to act for you. It is wise to research what these are before embarking down this route to solve your debt problems.
Alternatives to bankruptcy for individuals could lie in a small range of debt management approaches that are now available and which would help you avoid taking the drastic step of entering bankruptcy. The following are examples:
- Debt settlement could be a solution for you. It is a means of allowing you to approach your creditors, offer them a lump sum to complete repayment on your debt to them in exchange for wiping away the remainder.
- Debt management may also be the answer to your problems. It is the categorization, and better management, of your debt.
Healthy and unhealthy types of debt can be identified to form the basis of managing your way out of your predicament. For example, loans which were taken out on house purchase (mortgage) can be deemed healthy as housing is an asset, and loans taken out for consumerist type goods which essentially devalue as soon as they are bought, such as mobile phones and entertainment, can be deemed unhealthy. This kind of classification can lead to renegotiation of loans to reduce levels of repayment or to debt settlement as above.
Seek help from the professionals
Financial Rescue always recommends that whatever approach you are considering, the best course of action is to consult with professionals in the financial sector who have the experience and skill to help you.
Debt management, whether you do it alone as it accrues, or whether you consolidate and resolve it within a negotiated plan, is stressful for you and your family.
Bankruptcy itself, if it is an option for you, has huge pitfalls and enormous consequences, even though it can ease your burden and help you eventually start afresh. The legalities and the formal issuance in relation to the courts that need be made on your behalf can, of course, be fulfilled alone, but they are so much easier if a professional takes them on instead. The expenditure will be well worth your while. If you believe you are facing bankruptcy or are contemplating any other form of debt resolution contact Financial Rescue today.
Financial Rescue has staff team which is certified, qualified and experienced to advise you on your debts and what it the best course of action for you. Whether it be bankruptcy or an alternative resolution, they will guide you to make an informed decision.
The Answer To Your Debt Settlement Concerns
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Most of our clients pay off their balances within 36 months with one low monthly program payment.
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Disclaimer: Some programs and services may not be available in all 50 U.S. States. The information provided is for informational purposes only. No communication should be considered legal advice. Individual results may vary based on program terms, ability to save sufficient funds, underwriting guidelines, the creditors in your individual profile, and the willingness of creditors to negotiate. Individuals depicted in images and videos may or may not be employees, and some are actors or models, all of whom do not necessarily endorse or support Financial Rescue, LLC. Financial Rescue, LLC, does not assume any debt, make monthly payments to creditors or provide tax, bankruptcy, or legal advice.