Bankruptcy has long been associated with a type of moral character flaw. It sometimes seems as if a person’s financial situation is somehow completely and uncompromisingly tied to their value as a human being. The stigma surrounding bankruptcy reveals a pernicious false equivalency. Somewhere along the way, a person’s finances became conflated for their worth. If one has wealth, then they surely earned it. Right?
This stigma is socially and psychologically damaging to people who secretly fear the possibility that bankruptcy might be in their best financial interest. In addition, the fear of bankruptcy fosters an intentional ignorance regarding how bankruptcy works and the various types of bankruptcies one can file under. This means that people often allow their financial situation to worsen before seeking help. Thus, like most fears, the fear of bankruptcy and its associated stigma is counterproductive.
We Are Not 100% in Control of Our Finances
The truth is that we cannot accurately predict the future. We don’t know if there will be forces beyond our control — like accidents, illnesses, pandemics, or natural disasters — that rip the financial agency from our grasp. You could have done everything by the book and still face financial turbulence due to unforeseen circumstances.
The first step toward preserving your financial legacy is to remove emotions such as guilt and shame from your decision-making process. The longer you allow guilt and shame to cloud your judgment, the longer your financial recovery will take.
Here are some bankruptcy statistics to help you realize that declaring bankruptcy is not a moral or financial failing that you are guilty of committing.
- Only 5% of bankruptcies in the US could be directly attributed to poor financial management and reckless spending.
- 62% of bankruptcies filed by individuals were directly due to medical expenses.
- 72% of these medical-expense-related bankruptcies were filed by people with health insurance.
- Only 3% of bankruptcies are filed by corporations — leaving 97% filed by American individuals.
What Bankruptcy Options Are There?
If you’ve never explored the topic before, you may be surprised to learn that there are various chapters of bankruptcy you can file under. In addition, depending on an individual’s debts and assets, the bankruptcy process can look very different.
Here are the most common types of bankruptcy filed by individuals:
Chapter 7 Bankruptcy
Chapter 7 of the bankruptcy code details the legal process for the liquidation of non-exempt assets. During chapter 7 proceedings, a court-appointed trustee sells off the debtor’s non-exempt assets to creditors until those assets are completely liquidated. After this, any remaining debts are discharged.
This chapter is the most “severe” chapter a person can file under, as it stays in the filer’s credit report for ten years and reduces their ability to secure loans for the duration. Because of the ramifications of chapter 7, individuals seeking relief from their debts are encouraged to attempt the other chapters first.
If approved for these other chapters, debtors can restructure their existing debts and retain more assets.
Chapter 11 Bankruptcy
Chapter 11 Bankruptcy is open to individuals, businesses, and other legally defined entities. However, it is the most complicated and expensive type of bankruptcy, so many individual filers seek out chapter 13 instead.
If you have the means, then this chapter affords you the most agency during the process. You are allowed to retain many assets and have the opportunity to repay your debts in full with a court-approved repayment plan that you get to propose.
The complications — and expenses — arise from the negotiations surrounding this repayment plan. The court not only must deem it fair, but the creditors have a say in the process as well. This creditor’s committee is paid for at the expense of the debtor. Because of this, chapter 11 is costly and time-consuming.
An additional upside to chapter 11 bankruptcy is that a court-appointed bankruptcy trustee is optional. These trustees act as the intermediary between the debtor and creditors and are necessary for the chapter 11 and chapter 13 process.
Chapter 13 bankruptcy
If you are considering filing for bankruptcy as an individual, your best bet is chapter 13. This option is only available to individuals who can prove they have a steady income. Unlike chapter 7 and chapter 11, there are debt limits that determine if a person is eligible or not.
However, like chapter 11, chapter 13 allows debtors to follow a three to five-year repayment plan, but unlike chapter 11, this repayment period cannot be extended except in one specific circumstance. The repayment plan involves the debtor handing over expendable income to the bankruptcy trustee, who then allocates payments to the various creditors. This plan also allows debtors more exemptions than in chapter 7, protecting important assets like property and automobiles from seizure by the bankruptcy trustee.
An additional upside to chapter 13 bankruptcies is that the approval process is much more expedient than chapter 11.
Seek the Advice of a Bankruptcy Lawyer
Bankruptcy lawyers know the bankruptcy code inside and out. They are in the business of securing their clients the best deal possible. Bankruptcy lawyers act as advocates in court and negotiators in hearings. They help filers complete the appropriate forms and paperwork and give invaluable counsel. After researching the bankruptcy options available to you, seek legal counsel from a bankruptcy attorney.
As mentioned above, filing for bankruptcy is not a moral failing. Despite the stigma associated with bankruptcy, the fact is that, overall, they are on the rise. The number of bankruptcies is expected to explode in the following years due to the coronavirus pandemic. Do not run from the option if you know that it is what’s best for preserving your financial legacy down the road. Bankruptcies offer filers a second chance to regain a sense of financial agency.
About the Author
Veronica Baxter is a writer, blogger, and legal assistant operating out of the greater Philadelphia area. She writes for successful Philadelphia bankruptcy attorney David M. Offen.
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