Every time the federal government raises interest rates, it's harder for the average person to get new credit. And you may have found that your existing credit card debt has jumped.
If you stop making minimum payments, your phone will likely start blowing up with calls from creditors trying to collect debts.
Before you resort to bankruptcy, you should consider debt consolidation or refinancing.
But if those options don't work out, and bankruptcy is looking like your best option, you'll need a lawyer.
Why? Bankruptcy law is complicated. And by the time you get to this point, you'll likely be exhausted and stressed.
When money is tight, the last thing you want to do is pay a lawyer. But in this scenario, you really will need one. In order to pay less, you'll want to get the proper paperwork together ahead of time and develop a basic understanding of bankruptcy.
Types of bankruptcies
Chapter 11 bankruptcy is designed to allow a struggling business to reorganize and pay off debt. It can help a company keep its doors open until it can get back on solid financial footing. Once a business files for Chapter 11, it prohibits most creditors from going after you. A business that files for Chapter 11 must come up with a reorganization plan within a certain timeframe and start to pay back creditors. Think of Chapter 11 as a tool for saving the business rather than a last resort or a sign of failure.
Chapter 7, on the other hand, is for those businesses and people who plan to liquidate, or sell off assets, in order to pay back creditors. Once you file for Chapter 7, creditors are no longer able to come after you.
Chapter 13 is generally used by individuals, but can be used by small businesses with sole proprietors. This type of bankruptcy can’t be used by those with an LLC or other separate legal entity. In this case, the person filing bankruptcy is responsible for their individual as well as business debts. Chapter 13 doesn’t require you to liquidate, i.e., sell off your property. Instead, it helps you to reorganize your debts while paying off a portion through a repayment plan. Some debts must be paid off, while others can be discharged. It will all depend on the repayment plan.
Before filing for bankruptcy there are several steps you should take.
- Manage and prioritize spending – Only pay what is necessary and save money to fund a bankruptcy.
- Don’t put your own money into the business – Many people may be inclined to want to keep the business afloat with their own money. If it appears that bankruptcy is inevitable, save it and put it in after the bankruptcy is filed.
- Line up a buyer or lender for the bankruptcy – This enables you to get out faster if you do it in advance.
- Talk to a lawyer early to find out what you can do in bankruptcy – It is often better to make the deals or sell the assets or lend money after a bankruptcy filing than before because you have more options. It is imperative to talk to a bankruptcy attorney before it becomes an emergency so you know your options.
- Look ahead – Anticipate when the loan will expire, when the market will change or if the costs will go up, and plan for it.
- Regardless of which type of bankruptcy you choose to file, being prepared will make the process go smoother. Bankruptcy law is complex so it’s best to discuss your options with a qualified attorney. They can save you time and help you to understand what is best for you.
This article is intended to convey generally useful information only and does not constitute legal advice. Any opinions expressed are solely those of the author, not LawChamps.
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