Bankruptcy: What You Really Need to Know

Bankruptcy serves a distinct and important purpose in the modern world, and it’s slowly shedding old negative associations as more and more people come to understand how it works and why it exists.  In fact, over a million people a year file for bankruptcy in the United States, seeking the protection of the court while they put their affairs in order.

The fact that so many people have chosen to pursue bankruptcy as a final solution to their financial problems should not, however, give the impression that bankruptcy is no big deal or can be a casual solution to reckless spending.  Bankruptcy is complex and has a long-lasting effect on your life; it should never be entered into lightly.  Here’s what you need to know:

• There are two main kinds of bankruptcy: Chapter 7 has the ability to erase your debts completely, and it removes you from contracts with creditors.  Chapter 13 involves a five-year payment plan before your debts are completely removed.  Each has specific advantages and disadvantages – know them before you file.
• Don’t hesitate.  While bankruptcy shouldn’t be an option while you still have resources, you also shouldn’t wait until disaster has already struck.
• Don’t commit fraud.  If you think taking cash advances on your credit cards or transferring assets into a relative’s name just before declaring bankruptcy won’t be noticed by the courts – think again.
• Hire an attorney.  An attorney who specializes in bankruptcy law is essential – don’t try to go it alone.  Bankruptcy law is complex and your finances are complex.  Whatever you think, you need a qualified expert on your side.

 

Bankruptcy can save your retirement funds, your home, and other assets while giving your creditors a chance to salvage something from the loans made to you – this is an essential aspect of the modern world and shouldn’t be treated lightly, for any reason.  The better prepared you are for bankruptcy, the better the process will serve you.

Bankruptcy is Saving the World

For a lot of people, the term “bankruptcy” refers to a trick: People rack up immense debts they can’t hope to pay back, and when justice begins to close in on them they can jump in the escape pod marked Bankruptcy and wriggle out of the consequences, only to repeat the cycle.  This, of course, isn’t true, and as bankruptcy rates skyrocket during the worldwide economic slowdown we’ve been experiencing, more and more people are realizing that bankruptcy serves a legitimate purpose in the world.  To put it in dramatic terms: Bankruptcy allows civilization to exist, because it gives us rules and structure for dealing with financial ruin.

The Bad Old Days

In the past, an inability to pay bills was dealt with via a destructive and unrealistic hostility.  People were even thrown into jail because they failed to pay their bills, and even where debtor’s prison didn’t exist, there were usually endless rounds of punishments that sank people into a hole they would never crawl out of.  While that might seem like justice to some folks who have smugly never missed a payment in their lives, the fact is it was totally harmful to society: The debtor had no chance not only of paying off that specific debt; they had no chance to pay off other debts either.  Punishment therefore spread like a cancer to all the interested parties.

The Modern Method

In contrast, bankruptcy today allows for an orderly and fair review of the debtor’s assets and debts, and as many debts as possible are made whole.  Lenders are able to negotiate to get at least some minimum amount of their principal back, and the debtor is allowed to rebuild their lives and their finances not only after their debts are discharged, but during the process as well – which benefits everyone.

More and more people are realizing this – more than a million people filed for bankruptcy protections under either Chapter 7 or Chapter 13 in 2012 and 2013.  The two main types of bankruptcy differ slightly in the details of how they work, and a professional should be consulted before making any decisions involving bankruptcy.  But if you are at a point where paying your debts has become impossible, it’s a better choice to alert your creditors and work with them under a legal structure than to deny what’s happening and let chaos rule the day – as it surely will if you don’t file.

 

Bankruptcy Can Save Your Retirement

What most people never seem to understand about their retirement is that it’s never a straight line.  Retirement goals zig and zag, and if you’re going to enjoy your twilight years in comfort and security you have to constantly adjust to keep up.  More importantly if life starts throwing you curveballs before you’re retired, the worst thing you can do is deplete your already-challenging nest egg in order to pay for them.

Increasing Debt

The numbers are depressing: Despite being generally underprepared for retirement already, more and more people are borrowing from their 401ks and IRAs in order to fund healthcare costs, keep home mortgages current, or even to fund school tuitions as they attempt late life career swings after a layoff or downsizing – in fact, Americans over the age of 50 already account for $36 billion in student loan debt.

It’s tempting to draw on your retirement funds to handle these debts and to think about them as “investments in your future” – but it’s a huge mistake for two reasons: One, since you’re essentially borrowing against yourself, these debts can’t be handled with bankruptcy protections, and two, by extension, that means bankruptcy can’t save your retirement from disaster.

The Bankruptcy Option

Bankruptcy has a bad reputation.  But if you run into debt problems later in life when your income is shrinking, bankruptcy becomes your best friend, because your retirement accounts – whether they are 401ks, IRAs, or SEPs – cannot be used to discharge your debts when you’re in bankruptcy.  That means that when you hit bottom with your financial life, bankruptcy can salvage your retirement and ensure you won’t spend the final years of your life trying to make ends meet on Social Security and handouts.