Bankruptcy is a form of legal protection provided to individuals who find their financial situation has become so poor they can no longer meet their debt payment obligations. This type of consumer protection is in stark contrast to the debtors’ prisons which operated on the turn of the industrial revolution.
Governments realized that consumers required some kind start over option, and this chapter 7 and chapter 13 bankruptcy options were created. Because bankruptcy is meant to function as a last inline option to solve one’s financial issues it is important to know exactly when declaring bankruptcy is the decision.
Here we will go over some basic indicators of when one should consider bankruptcy.
Meets Eligibility Requirements: For Bankruptcy to be considered a viable option one must ensure that they meet the state requirements. Typically, this requires one to earn less than the monthly median income for their state as well as submit to, and pass, a means test.
A means test takes stock of an individual’s debts, assets, and legal situation to determine if they are fit for chapter 7 or 13 filing.
Secured Debts Too Large To Payback: Secured loans are loans in which the lender requires the individual to put some type of asset up as collateral. If a debt goes unpaid the lender can take control of the asset to sell it. The proceeds of the loan are then used to pay off the remaining balance of the loan.
In the case that the proceeds from the sale do not pay off the entire balance, the lender will usually sue the individual in an effort to recuperate the remaining balance. Bankruptcy provides the individual with legal protection against this type of action. The lender will still be able to sell
If an individual has a large amount of debt secured with assets whose value will not cover the debts then bankruptcy may be the answer.
High Debt To Income Ratio: Debt to income ratio is a metric used to determine how much of one’s monthly income goes towards servicing their debts. Sometimes, one’s income to debt ratio is so high they find themselves making the choice between meeting one’s payment obligations or paying living expenses. In this case, it is important to seek the advice of an experienced Orlando Bankruptcy Attorney to better understand their options.
Too Much Debt: Sometimes an individual has simply amassed an amount of debt they won’t ever be able to pay off. This can be especially true if the individuals’ economic situation has changed drastically over the past year. Once again, seeking professional counsel can help one understand what the realities of their situation is.
Conclusion: Bankruptcy is a last resort and should not be taken lightly. The consequences for declaring bankruptcy are serious: major drop to one’s FICO score, 10-year public bankruptcy record, and inability to receive unsecured loans for many years after. This being said, sometimes an individual simply has no other choice; their debts have become too hard for them payback and live a reasonable quality of life.