Have you heard of the term personal bankruptcy? If not, you’re not alone. Most people haven’t heard about it until they’ve faced an impending financial crisis that causes them to ask, What is personal bankruptcy?
Personal bankruptcy, or Chapter 7 bankruptcy as it’s formally known, is defined as the legal action used by individuals who are unable to pay their debts and financial obligations despite making what seems like every effort possible to do so.
What Is Personal Bankruptcy
Personal bankruptcy, also known as consumer bankruptcy, is a last-resort financial tool that can help individuals or couples eliminate overwhelming debt. The relief of personal bankruptcy comes with substantial drawbacks, however. Filing for Chapter 7 or Chapter 13 bankruptcy will damage your credit score and potentially prevent you from taking out a mortgage in the future.
Bankruptcy protection also only lasts for a few years before it needs to be renewed. Because of these limitations, personal bankruptcy isn’t usually recommended unless there’s no other way out of insurmountable debt problems. But before filing for insolvency yourself, read on to find out everything you need to know about going bankrupt and how you can avoid it if possible.
If you don’t want to go bankrupt, pay off your debt
In 2010, more than 1.4 million Americans filed for bankruptcy protection. Almost 25 percent of those bankruptcies were a result of medical bills, including unpaid hospital bills or costs from surgery or treatment of injuries from car accidents, according to statistics from The Wall Street Journal.
If you don’t want to go bankrupt, pay off your debt! And always pay your credit card balance in full each month to avoid going into debt on your plastic. Just one thing: Credit cards should be used for purchases you can afford to pay off—not emergencies—because if you’re stuck with credit card debt at high interest rates, you might find yourself sinking deeper in debt over time instead of digging yourself out. Try never carrying a balance on your credit cards if possible.
What if I don’t have enough money
If you’re just not making enough money to pay your bills, it’s tough to come up with a $5,000 payment on an emergency basis. While you can try securing a bank loan or credit card, having all of that debt hanging over your head could make things even worse in a few months if you don’t get back on track.
If things are really dire, filing for bankruptcy might be your only option. And then there are those who just have too much debt. In many cases, personal bankruptcy is necessary when people become overwhelmed by their debt load—usually as a result of medical problems or job loss.
Are there other options
In addition to personal bankruptcy, there are other options if you’re deep in debt. Credit counselors can help create a budget and make sure you pay your bills on time. If your income is not enough to cover your expenses, you might be able to get government assistance (although benefits will be reduced with cuts set for 2014).
Individual lenders may also offer some flexibility if it looks like you won’t be able to pay them back. However, they’ll likely charge higher interest rates or fees. Whatever you do, avoid falling behind on payments—missing even one payment can damage your credit score significantly (by as much as 100 points), making life difficult in a number of ways down the road.