You're struggling to pay back the money you owe. Even when we try to do everything possible to pay back what we owe, there are times when life gets in the way. Working with the lender to restructure your debt could be an essential step when this happens. When that fails, you may be facing debt collection actions. Bankruptcy may cross your mind. Should that be the decision you make?

What Is Bankruptcy?

Bankruptcy is a legal right that consumers in the U.S. have under federal law. It allows a consumer to ask the courts to liquidate their assets to repay the debt they owe. In many cases, it results in the courts discharging, or forgiving, the debt owed. That may mean you do not have to pay it back. However, bankruptcy also means you've become insolvent, which means that you are admitting you cannot make payments on the funds you've borrowed. That will impact you for many years moving forward, making it much harder for you to borrow money from other lenders and could impact you in other ways.

Types of Bankruptcy

Several types of bankruptcy, named based on the chapter of the legal tax code, are referred to under U.S. federal law.

• Chapter 7 Bankruptcy: In this form of bankruptcy, sometimes called straight bankruptcy, a consumer requests that the court liquidates their unprotected assets and use the funds to repay their debts and creditors. Any remaining debt is forgiven.
• Chapter 11 Bankruptcy: During this type of bankruptcy, the consumer works with the bankruptcy court to reorganize the debt into more manageable payments. The lender then receives payments, often less than what is being paid now, for 4 to 5 years. During this process, some of the debt owed is repaid, but typically not all of it.

To qualify for Chapter 7 bankruptcy, you must agree to have your assets liquidated, which means you could lose them. That includes money in your bank accounts and many high-valued assets you own. To qualify for Chapter 7, your income must also be below the threshold set for your region.

In Chapter 11 bankruptcy, you do not have to liquidate your assets. If you want to keep your assets but need help restructuring the debt to make it easier to pay, this type of bankruptcy may be a better fit for you.

Pros and Cons for Each Type of Bankruptcy

Consider the pros and cons of each type of bankruptcy based on your needs.

Chapter 7

Pros:

• You get to discharge most of your debt, so you likely do not have to repay that debt over time.
• If you do not have many assets, this method allows you to get a fresh financial start.

Cons:

• The bankruptcy will remain on your credit report for up to 10 years.
• During that time, you may find it hard to obtain new credit, including car loans, credit cards, and others.
• Your income level may restrict you from using this form of bankruptcy.

Chapter 11

Pros:

• You can pause debt collection actions, including foreclosure, to work out a debt repayment plan that is a better fit for yourself.
• You don't have to sell your assets here. You can keep what you own.

Cons:

• Chapter 11 requires up to 5 years of repayment when you must pay the bankruptcy court to reduce your debt. Not all of your debt is forgiven.
• It will remain on your credit report for up to 7 years beyond that period. During that time, they'll be limits on obtaining new credit.

Signs You May Need to File

How do you know you should file for bankruptcy instead of trying to work out what you owe?

• You cannot pay monthly payments towards the debt you owe.
• Your debt is growing even though you are making payments.
• You've lost your job and do not have another source of income.
• You can't pay off your debt in the next 3 to 5 years.
• You risk losing your home due to debt nonpayment.

How the Bankruptcy Process Works

The bankruptcy process is rather long and complicated. Here is what to expect from it:

• Contact a bankruptcy attorney who can help you to file bankruptcy.
• Passing the Means Test helps determine your eligibility for bankruptcy based on your income, family size, and where you live.
• Complete a credit counseling program online or in person.
• Filing bankruptcy court documents outlining all the debts you plan to include.
• Attend necessary bankruptcy hearings.

Over several months, you will receive notice of discharge of your debt, or in the case of Chapter 11, you'll be in reorganization.

Choosing an Attorney

A bankruptcy attorney can help you through the legal process. It is best to work with one that's local to you and can offer you the support you need to understand your rights throughout this legal process. You also want an attorney to help you negotiate with lenders, especially if you plan to keep your home.

Setting Expectations

Bankruptcy is a serious process that will lead to long-term financial implications. It's important to know what to expect.

• Create a budget for yourself now. Be sure you fully understand what your financial obligations are. Be realistic about your income going forward.
• Plan to live on a cash budget without using credit for some time.
• Talk to your attorney about any risks you face with the process, including how it may impact your ability to get insurance or some jobs.

Rebuilding Your Finances After Bankruptcy

After you've filed for bankruptcy, you'll need to work to rebuild your credit over time. That process will take time, but you can do it if you:

• Make all payments on time.
• Use secured credit cards to help you to re-establish your credit over time.
• Avoid making any payments late.
• Work with a debt counselor to help you to make wise financial decisions.
• Borrow when you need to and repay your debt as agreed over time. Try to pay off everything you borrow each month.

These steps can help you to improve your financial health. For many people, bankruptcy is a valuable tool worth pursuing.