By the time the average person is ready to declare bankruptcy, they’ve probably done everything they can to deal with a looming financial crisis. Often unexpected life events and crises lead to the acquisition of debt that becomes too monumental to be repaid.
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While nobody may like the idea of bankruptcy, for both psychological and financial reasons, it can be the only thing to keep someone from a dire situation.
Bankruptcy experts explained seven key signs that, in some cases, bankruptcy might actually be a good thing.
You’re Fending Off Creditor Actions
From a legal perspective, it’s a good sign that filing for bankruptcy might be good for you if you’re having a hard time fending off creditor actions because of your liabilities, according to Paul Koenigsberg, an attorney with Koenigsberg & Associates
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Your Assets Are at Risk
Another sign is when your essential assets are at risk, such as your home, car or even salary, Koenigsberg said. “Filing bankruptcy invokes an automatic stay, which legally stops creditor actions like lawsuits, garnishments, repossession and foreclosures,” he said.
While it does have its downsides like a negative effect on your credit score, you’ll at least be able to keep your home, car and paycheck, which can be your critical starting point for bouncing back. It’s intuitively much harder for someone to get back on their feet if they don’t have the basics to begin with. You can think about your credit score later.
It Will Help You Get Ahead
Filing for bankruptcy can provide a fresh start for distressed borrowers to resolve their personal debt obligations and move forward with financially sustainable futures, according to Scott Barna, president at Stretto, a bankruptcy services and technology firm.
Though bankruptcy often has a bad rap as a way to clear the slate of past financial bad habits, Barna pointed out, “The bankruptcy code is intended to provide rehabilitation and restoration so that an individual can get out from under unrecoverable financial burden and back to financial health.”
You’ve Had a Crisis You Can’t Come Back From
Barna explained that data shows millions of Americans live paycheck-to-paycheck and that major life events such as medical crisis, marital change or job loss puts people at risk of being unable to pay their bills.
“Bankruptcy exists on a financial resolution spectrum and in consultation with professional advice from a qualified bankruptcy attorney, it may be the most viable path to resolution.”
For hundreds of thousands of individuals every year, filing for bankruptcy is often the only option that is going to allow the person to return to a stable financial place. Bankruptcy is also an extremely powerful process, with the ability to stop foreclosures, repossessions, wage garnishments, collection lawsuits and much more.
It’s Your Only Avenue to a Financial Lifeline
Bankruptcy is, in essence, “an avenue of financial recourse for distressed consumers,” Barna said. “The reality is that the financial profile of consumers who file for bankruptcy versus those who persist under difficult economic circumstances is not dissimilar. It is typically the life event catalyst that compels the consumer to proceed with bankruptcy because alternative paths to financial rehabilitation are closed.”
When You Can Live With a Lower Credit Score
A key sign you should file for bankruptcy is if your existing financial burden or crisis is worse than the impacts the bankruptcy will have on your credit score. Barna said bankruptcy drops credit scores significantly upon filing. However, once the bankruptcy is complete, you have the ability to rebuild your credit score in a matter of only a few years.
Rebuilding credit requires that you have discharged all your debts, those covered in the bankruptcy filing and any others, Barna said. You also typically need to have engaged a structured repayment plan and show you can responsibly repay any obligations
“The further back the bankruptcy discharge is on the calendar, the more the individual’s credit will recover,” Barna said.
You’ve Explored Your Bankruptcy Types
Lastly, you should only pursue bankruptcy when you’ve clearly looked at all the key types of bankruptcy and met, or plan to meet, with a legal professional who specializes in these proceedings. Here are the key types of bankruptcy, Barna explained:
- Chapter 7 bankruptcy: Chapter 7 involves the liquidation of a debtor’s assets. Individuals who cannot pay their debts and have no prospect of reorganizing their affairs profitably may consider Chapter 7 as a way to discharge some debts with certain exceptions; the most common of these exceptions are certain taxes, family support obligations, student loan debt and fraudulently incurred debt.
- Chapter 13 bankruptcy: Chapter 13 allows a distressed debtor who has regular income, and total secured and unsecured debt of no more than $2,750,000, to maintain control of their assets while undergoing bankruptcy. It requires that the debtor confirm a formal plan to repay creditors over a period of time and, thus, is typically a longer process than a Chapter 7 liquidation.
- Chapter 11 bankruptcy: Chapter 11 allows an individual who doesn’t qualify for Chapter 13, or who needs some of the special protections of Chapter 11, to reorganize their debts, Barna shared. This can allow a debtor to catch up on mortgage arrearages, restructure debt on investment property and reduce totals owed on credit card and medical debt. Personal Chapter 11 filings are associated with larger debtor estates.
Barna’s best piece of advice overall is to take the counsel of a practiced professional, specifically a bankruptcy attorney, who can provide valuable guidance into whether a consumer should file for bankruptcy and if so, what chapter.
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This article originally appeared on GOBankingRates.com: 7 Key Signs Bankruptcy Is Not a Bad Thing for You
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