How to avoid bankruptcy?

Bankruptcy is a legal term that denotes a state of financial vulnerability, owing to which a borrower is unable to repay his debts. This relates to any business as well.

The following can help a borrower to analyze the risk of getting bankrupt:

1. Late payment of credit card bills. The risk increases considerably if borrower is often never able to make timely repayments.
2. The borrower is unable to keep the credit scores under available credit limits.
3. The borrower exceeds his credit card limit.
4. He is unable to meet the creditors’ demands.
5. He is unable to meet even the minimum amount of debt pay-off.
6. Consistent use of credit lines and cash advance schemes.
7. Denial of credit by creditors.

Incase the borrower falls under the ‘weak’ category, he runs a great risk of bankruptcy.

What does it mean to declare bankruptcy?

Filing for bankruptcy proves beneficial for individuals who suffer financial stress. Financial weakness in turn leads to emotional distress. Declaring bankruptcy is a good way out of this viciousness. Individuals who have unsecured assets, like credit cards and are unable to repay their debts in five years time are likely to benefit from bankruptcy. However it does not help in cases of child support or tax payments that are due and alimony.

According to the law of bankruptcy borrowers or businesses that are bankrupt can be completely released of debts. A court order in favor of the bankrupt person or business helps them to get rid of the amount outstanding and start afresh. There is also another option to getting in touch with the creditors or lenders to negotiate over a repayment scheme. This requires restructuring the debt. Generally, credit counselors work at getting some relaxation from the debts. These counselors contact credit card companies and revise the debt pool of the individual or business. The borrower is expected to pay off the updated debts, under the revised repayment plan. This provides great relief to the bankruptcy and also safeguards the creditors’ interest. Credit card companies can avoid losing a lot of money by resorting to well-planned debt re-repayment schemes for their bankrupt consumers.

Filing of bankruptcy refrains the credit card companies from collecting the debt from the bankrupt borrower. This provides temporary relief to an individual or business since the court orders the seizure of assets. Creditors cannot pressurize borrowers to pay off their debts once they have filed bankruptcy. Credit card companies cannot call or write to borrowers in the case of declared bankruptcy.

Drawbacks of filing for bankruptcy

Filing for bankruptcy marks the credit report in the negative as it displays an individual’s inability to meet the expected credit ethics successfully. This restrains the borrower, now declared bankrupt, from making any major purchases for a period of ten years. Incase the borrower manages to organize the credit in less than ten years; the interest levied on the debt is much higher.

It could cost a minimum of $200 to file for bankruptcy. The extra service charges levied on the borrower depend on the attorney dealing with the case.

Types of bankruptcy

• Chapter 7 Bankruptcy /Straight Bankruptcy: Debtors are permitted to liquidate all the non-essential assets in order to avail of complete debt relaxation. Essential assets like a home and car are not taken away since the court holds these properties as instrumental in starting afresh. The individual is required to continue making payments for the essential assets. This type pf bankruptcy can be filed for only once in six years.
  
  
• Chapter 13 Bankruptcy: All the debts are not evaded. Only some of the debts are relaxed and the borrower is supposed to agree to a monthly payment on the existing debts, within three to five years. In chapter 13, bankruptcy requires the person to have a reliable source of income. His secured debts should be less than $870,000 and unsecured debts should be less than $290,000.
  
  
• Chapter 11 Bankruptcy: Bankruptcy is exclusive to business cases. The court orders the creditors to provide some grace period for settling the debts while the business continues.

Ways and means to avoid it

1. Make intelligent investment plans.
2. Diversify the investments.
3. Prefer long-term financial planning.
4. Do not make a choice over investments based on returns alone. Conduct proper research before making any kind of investment. There is no point in calculating returns without studying the risk factor involved.
5. Request the creditors to revise the payment plan so as to ease the interest charges.
6. Negotiate with banks.
7. Consolidate the debts.
8. Credit counseling

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