When is Bankruptcy Acceptable?

Most of us don’t like to think that bankruptcy is acceptable in any circumstance. After all, if we incur debt, shouldn’t we pay it? However, the recent economic turmoil, and the long, long recovery time expected for the economy and job market (some say the job market may never recover), some are beginning to rethink their ideas of whether or not bankruptcy is acceptable.

Have You Done Everything You Can?

For some, bankruptcy comes after a long-fought battle. You might have had your hours cut at your job, or a medical catastrophe might have left you swimming in unaffordable bills — even though you have health insurance. The reality is that there are people out there that are trying to meet their obligations, but are financially unable to. Instead of trying to keep paying creditors, sometimes it is better for these to file for bankruptcy and start over.

You might feel as though you have a moral obligation to pay your obligations as you can. In these instances, you can apply for Chapter 13 bankruptcy. If you have income, this option provides a plan for you to repay some of your debt, via a plan, over the course of three to five years. It’s not the same as simply walking away, and many consumers are more comfortable with this option.

Filing Bankruptcy While there is Still Something to Salvage

In January of 2009, personal finance giant Jane Bryant Quinn surprised many by writing a column for Newsweek stating the case for bankruptcy. Quinn’s argument was this: If you are stuck, and you aren’t going to be getting out of the hole anytime soon, salvage what you can be filing for bankruptcy sooner rather than later. The idea was that, before you drain your retirement accounts and sell your home, you should file for bankruptcy protection. That way, you protect your future, and you put yourself in a position to build from the wreckage of your finances, since a large portion of your retirement accounts and the equity in your home are often protected during bankruptcy.

This viewpoint is intriguing. It’s somewhat akin to considering foreclosure as a savvy financial move. Rather than futilely beating your head against the wall of debt that you will never catch up on, the idea is to walk away and try to start fresh. Financially, this can make sense; if you know you won’t be able to meet your obligations, liquidating all of your assets and going completely broke might not be the smart financial play.

Bankruptcy: Don’t Take It Lightly

Even if you decide that you have no choice but to declare bankruptcy, it is important to carefully consider your situation. A bankruptcy can remain on your credit report for up to 10 years, bringing your credit score down. It can be difficult to rebuild your credit after a bankruptcy, so you need to take that into consideration. Additionally, you need to make sure you understand what might required of you during bankruptcy, and that you file for the proper protection, since different types of bankruptcy can means different obligations.

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Comments | 2 Responses

  1. says

    Very good tips Miranda, especially the caveat that bankruptcy has long term implications on your credit score and financial future. It is important that people keep this in mind.

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