Bankruptcy: A Lament Or a Lifeline?

In your personal and business finances, peaks and troughs are an unfortunate inevitability. Even the most successful entrepreneurs have gone through periods of financial hardship. From rapper 50 Cent to Mark Twain, many wildly successful people have filed for bankruptcy and gone on to bounce back better than ever. Even the absurdly wealthy President Trump has been declared bankrupt no less than four times.

There are many reasons why individuals and businesses file for bankruptcy, but is it an indelible black mark on your reputation, or a smart and informed financial decision. Well, that’s for you to decide, but what we can do is provide you with some important facts and help you to make an informed decision.

You are not alone

When debt begins to spiral out of control and you feel like bankruptcy may be your only option, it can be an emotionally traumatic experience that’s extremely damaging to your sense of self-worth. You can feel isolated and alone, but rest assured, you are not alone. As many as  800,000 people applied for bankruptcy in federal court last year. If you do file, you’re not required to broadcast it to friends and family and your partner or spouse doesn’t need to file along with you. 

Different kinds of bankruptcy

In the US there are two forms of bankruptcy; Chapter 7 and Chapter 11. The difference is that a Chapter 7 involves the liquidation of the individual or business’ assets, using them to pay creditors to the extent that they are able. In these cases a trustee is appointed to make sure that assets are liquidated and go back to the creditors in proportion to the debt. Chapter 11 is more a form of rehabilitation than liquidation. It reorganizes the debts and adjusts them in terms of repayment amounts and interest rates. Again, this is managed through a trustee. 

You won’t necessarily lose your house

Many who apply for bankruptcy fear that their house will go into foreclosure, but this is not necessarily the case. Depending on your state you may be able to delay or even prevent foreclosure with the help of an attorney by petitioning for an “automatic stay”. 

There is life (and credit) after bankruptcy

If you do decide to file for bankruptcy you may feel that it’s the end for you and your business, but there will still be lines of credit open to you. That said, remember that it’s an over-reliance on credit that leads many to bankruptcy in the first place. The reason so many people bounce back after bankruptcy is because it teaches them the value of budgeting and financial planning. That said, the limitations placed on credit by bankruptcy are often greatly exaggerated.

But be realistic

Bankruptcy is intended to wipe the slate clean and give you a fresh start, but let’s not pretend that it’s without financial consequences. Credit will get harder (though not impossible) to come by and it could have repercussions on your ability to borrow for your business which is why you should consider an alternative such as a consolidation plan before you consider filing for bankruptcy.