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Why bankruptcy is better than doing nothing

When a person gets behind in their financial obligations, his or hers initial reaction might be to ignore the problem and hope it goes away. But as debt mounts and there is no solution in sight, a pride may keep someone from taking legal action and asking for debt relief. For many, declaring bankruptcy, especially Chapter 7, is admitting defeat, and they feel they will be scrutinized for filing. But in most cases, a bankruptcy is the more financially prudent step to take over doing nothing and being at the mercy of creditors.

Although there may still be a stigma attached to filing for bankruptcy, it is an option that has become necessary for an increasing number of people. When the recession first took hold in 2008, there were 1.1 million bankruptcy filings, an increase of 32 percent. In 2012, the number jumped to 1.3 million. Now, the number is on the decline, with only 1.1 million filings as of June of this year.

Perhaps people have realized that a bankruptcy filing will do less damage than doing nothing at all. If a person ignores their creditors, then those creditors can take legal action. If they win, they can place liens on property, garnish a debtor's wages and seize tax refunds. In light of this, it is usually in a debtor's best interest to accept that there is not enough income to meet the financial obligations and file for protection from the court.

There are several forms of bankruptcy, but the most common for individuals are Chapter 7 and Chapter 13. In a Chapter 7 filing, all nonexempt assets (if any exist) are sold to pay creditors. The remaining debt that qualifies is discharged, and creditors are prohibited from taking any form of collection action. In a Chapter 13 filing, a debtor creates a repayment plan for the debt, which is paid over a period of three to five years. The debtor is still required to meet other financial obligations, such as paying the mortgage. After the set period of time, any remaining debt is discharged.

It is never easy for a person to admit that they are in a financial bind, but that step is necessary for a person to come up with a solution. Anyone who needs help examining their options can speak to a legal representative experienced in bankruptcy and debt relief to determine what approaches to managing debt might work for them.

Source: CNBC, "The good thing about bankruptcy" No author given, Oct. 21, 2013

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