A Primer on Bankruptcy – Part 1

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July 8, 2013 by Will Ray

Note: I am not an attorney and what follows is not legal advice.  If you are seeking specific answers about bankruptcy and how it relates to you, you should discuss your situation with a financial coach and/or an attorney.  

There can be a lot of confusion about bankruptcy.  Chapter 7, Chapter 13, all the chapters in between.  What’s the process and what does it mean for your finances?

At its essence, bankruptcy is a legal process that protects a debtor (a person who owes money) from his/her creditors (the entities to whom the debtor owes money).  When you have an unpaid debt, and you don’t pay it, you will eventually be sued in civil court.  The judge will most likely pass a judgement in favor of the creditor, and you’ll be forced to pay the judgement.

This can give the creditor authority to garnish your wages – to take their share before you get paid at work.  That process happens all over the country, thousands of times a day, and it’s an important part of our system of laws.

But imagine having a pile of debts, all calling you at once, all demanding their money, and then all suing you.  What a nightmare.  You only have so much money to go around, and you just can’t pay them all and eat and care for your family at the same time.  That’s a tough spot.  That’s the important role of bankruptcy – to protect those debtors from creditors who have the authority to take everything from them.

Over 1.2 million businesses and individuals filed for bankruptcy in 2012.  Currently, the number one cause of bankruptcy is medical debt.  Credit card debt is number two.  It’s important to note that bankruptcy does not offer protection from student loans or tax debt.

I believe many people who declare bankruptcy are likely in a position that can be remedied with sacrifice, a budget, and a plan to eliminate their debt – without declaring bankruptcy.  But many people just lose hope.  Maybe they just don’t know how to do it.

Unfortunately, we have a “bankruptcy industry,” so it can be a challenge to find objective advice.  Attorneys get paid to help you file bankruptcy, so it’s tough to know if you really should.

I believe bankruptcy ought to be a last resort.  We should strive to do the right thing, keep our word, and pay our debts.  It shouldn’t be “strategic” or “preemptive” because of what might happen in the future.  Bankruptcy has some serious long-term emotional and financial ramifications.  It’s not a quick fix.

With that said, bankruptcy can be the right route for some folks.  As I outlined, it offers important relief and protection for some people who are deep in debt and have no way out.

But like Oscar said, you can’t just say the word and fix everything.  Tomorrow I’ll get into some of the details about different types of bankruptcy and talk about the process.

What do you know about bankruptcy?  Do you know anyone who has gone through a bankruptcy?

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About me…

Youth minister, financial coach and part-time wedding photographer, based in Raleigh, NC

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