Bankruptcy and Associated Costs
Bankruptcy refers to the legal standing of a company, individual, or entity that is unable to pay back debts owed to a financial institution. It is a court-supervised procedure whereby a trustee takes over and sells all non-exempt assets to reduce them to cash. The debtor has the right to keep any exempt assets such as retirement assets, pensions, household appliances, clothing, vehicles, etc. The list of non-exempt property includes vacation and second homes, a second truck or car, and investments such as bonds, stocks, and bank accounts. Non-exempt assets also include heirlooms and collections of valuables such as coins and stamps. The types of assets that are exempt depend on the borrower’s state, territory, or province of residence. Some types of retirement plans are not protected.
Reasons for Bankruptcy
People go bankrupt for a variety of reasons, including divorce, prolonged illness, excessive debt, etc. The main goal is to discharge unsecured debt such as personal loans, liabilities under guarantee agreements, deficiencies after car repossessions, business loans, as well as credit card balances. Other types of debt cannot be discharged. These include restitution orders, bail bonds, court fines, and damages due to sexual assault and wrongful debt. Other types of non-dischargeable debt include student and secured loans, child support, and alimony. The list also includes tax credit overpayments, debts incurred due to fraudulent conduct, personal injury claims, and council tax.
Borrowers who have unsecured loans resort to bankruptcy to protect their property, including their house and vehicle, from unsecured creditors. Bankruptcy also prevents garnishment of income or wages (including seizure and attachment). Loss of property is the main disadvantage, but many borrowers don’t have any non-exempt assets and property.
Debtors who file for bankruptcy are forbidden from applying for CEO positions in limited liability companies. Other disadvantages include loss of non-essential assets and credit cards and difficulty obtaining a personal or business loan or a mortgage. Moreover, tax refunds from local, state, and federal authorities may be denied. Bankruptcy remains on the borrowers’ credit record for many years, and this may prevent them from finding good employment, especially in the field of finance. Bankruptcy has a negative effect on the debtor’s credit score, and it takes a long time to rebuild it. The cost of filing is another downside, and many borrowers are unable to afford it. Borrowers pay attorney fees, filing fees, etc. Those who are too broke may consider requesting a bankruptcy fee waiver. While some debtors pay about $300, filing usually costs between $1,300 and $2,100 (attorney fees included). It is a costly endeavor for companies. Depending on the complexity of the case, some lawyers charge $1,000 per hour.
Whether it is the best solution or not depends on factors such as the debtor’s income and assets, the types and amount of dept, exemptions, and state laws and regulations. Bankruptcy is a last resort, but borrowers with no savings and excessive debt often see it as their only solution. People who are unable to pay their loans and bills also sign up for money management and credit counseling plans. In case these don’t work, many debtors consider filing for bankruptcy.
Ways to Avoid BankruptcyThis is a drastic solution, however, and borrowers are advised to try alternative methods first. These include individual voluntary arrangements, debt consolidation, debt restructuring, formal proposal to creditors, and negotiation. Debt restructuring, for example, is a solution for companies that face cash flow problems. Borrowers negotiate with the tax authorities, suppliers, and financial institutions. The main goal is to extend the term of repayment and to reduce the amount of debt.
Before filing for bankruptcy, borrowers are advised to sell some existing assets to pay a portion of their debt. Consignment shops, garage sales, and eBay can help debtors to raise some cash. They can sell collectible items, clothes, household appliances, fitness equipment, antiques, and anything else. Expense reduction also helps to service debt. This includes using public transportation, reducing food expenses, etc. Finally, debtors can avoid bankruptcy by borrowing from a friend, sibling, parent, or another family member. This is a viable solution only if it will help to avoid rather than delay bankruptcy.
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Chapter 7 Bankruptcy for Borrowers with Excessive Debt
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