Pros And Cons Of Bankruptcy Protection
Bankruptcy laws are implemented in the United States to protect the interests of both debtors and creditors. However, before an individual decides to file for bankruptcy protection, there are several factors that he would have to consider. These are the costs and benefits of bankruptcy, a financial future after bankruptcy, effect of bankruptcy on current and prospective employment as well as its effect on the credit history of the concerned individual. Moreover, the debtor should determine that the benefits of filing for bankruptcy protection outweigh its cost.
It is also important to determine prior to a petition if the debts incurred by the debtor are dischargeable or can be settled by petitioning for bankruptcy protection. Secured debts, for example, are not usually discharged by bankruptcy except if the debtor gives up his collateral. Secured debts, like mortgages and car loans, are those that were initially loaned out if debtors have properties that can be used as collaterals.
There are two common forms of bankruptcy protection. These are reorganization bankruptcy and liquidation bankruptcy. For Chapter 11 (rehabilitation or reorganization), Chapter 12 (rehabilitation for family farmers and fisherman, and Chapter 13 (rehabilitation with a payment plan for individuals with a regular source of income) are examples of reorganization bankruptcy. Chapter 7 (basic liquidation for individuals and businesses), on the other hand, is an example of liquidation bankruptcy. Among all bankruptcy types, Chapter 7 is the most common. For this, a bankruptcy trustee is responsible for liquidating or selling all non-exempt properties of a debtor and distributes the proceeds to all creditors. Bankruptcy protection filed under Chapters 11, 12, and 13 allows debtors to pay off their creditors through their future earnings.
Before initiating any petition for bankruptcy protection, it is crucial for a debtor to weigh the pros and cons of doing such. Filing for bankruptcy does not necessarily guarantee a solution to all the financial problems of a debtor. Moreover, doing such will have ramifications on his credit record. Since this will be seen in the credit record of the debtor for seven to ten years, it might become difficult for the debtor to obtain credit in the future. A debtor should likewise be able to identify the root of all his financial problems. If the cause is a sudden and unexpected event that negatively affects the ability of a debtor to pay all his debts then, it might be a good idea to file for bankruptcy protection. However, if the financial crisis stems from the lifestyle of the indebted individual, it might not be a wise idea to file a bankruptcy petition because there is a large chance that the debtor might find himself in a similar situation in the near future. Bankruptcy proceedings will no longer be a solution in this case because a debtor is not legally allowed to file for bankruptcy within six years from the last time that he did so. Furthermore, filing for bankruptcy protection may also affect the current and prospective employment of a debtor as well as his chances to be able to rent or lease properties.
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