Why File for Bankruptcy?

The major factors in deciding whether or not to file for bankruptcy are the amount of serious debt and the debtor's ability to meet the original payments (or, better yet, pay the full amount). Because individual circumstances determine whether or not filing for bankruptcy makes sense, ask yourself these questions before setting the process in motion: Will you be better off after the bankruptcy than you were before? If not, why take this step?

One advantage to filing for bankruptcy is the possibility of discharging most or all of your debt. In other words, you may not have to pay any of the money owed to creditors (or at least a substantial portion of it), allowing you to make a fresh start.

Declaring bankruptcy can prevent foreclosure on your property, eviction, or repossession of a personal vehicle. However, you will be obliged to continue making payments if you wish to keep the property; bankruptcy is not a means by which to keep possessions while evading payments.

Filing for bankruptcy can also help prevent harassing debt-collection actions by creditors. While it is true that filing temporarily stops creditors from engaging in total enforcement lawsuits, secured creditors are permitted to apply for relief from the stay and can continue to repossess or foreclose on the debtor. Moreover, certain kinds of debts, such as student loans, alimony and support obligations, debts incurred through fraud, and drunk driving restitution cannot be discharged in bankruptcy.

In corporations, bankruptcy is an option when the company has more debt than it can pay. Faced with this dilemma, filing for bankruptcy gives it legal protection from creditors. The company can then either escape the debt and go out of business, or develop a repayment plan and continue operating. Creditors are prevented from attempting to collect on debts outside the process set in motion by the bankruptcy filing.

Generally, the circumstances that lead a company to file for bankruptcy include the growth of debt over time until the business owners are faced with the reality that they have no reasonable hope of paying it off. For example, a sudden loss of revenue that prevents a company from paying their suppliers may make continued operations impossible if there is no relief.

An unexpected, sudden financial shortfall can result in a company having unsustainable debt without the income to pay for it. This sometimes occurs as a result of some misconduct on the part of the company. Government fines or a legal judgment can result in the loss of millions of dollars or more. In such cases, scandals can cause stock prices to drop. A company that is already struggling may not be able to sustain itself when its problems become public. Faced with public scandals and mounting debts, a tottering company's best option may well be to declare bankruptcy.

It is also possible for creditors to force a company into bankruptcy. The creditors may make this choice if they find out that the owners are selling off the company's assets and getting ready to dismantle the business without paying their debts. If a company is already making large payments to a different creditor, a creditor may have the option of forcing that company into bankruptcy.

Bankruptcy will not solve all of a person's financial problems, and it is not right for everyone. For example, bankruptcy will not:

• Overcome the claims of secured creditors. A secured creditor is one who possesses a lien, or security interest, in the property for which money was borrowed. In such cases, the property is called "collateral" and can be taken if the underlying debt is not paid.
• Overcome certain types of obligations. These include child support, alimony, certain other debts related to divorce, some student loans, court restitution orders, criminal fines, and some taxes.
• Overcome claims against cosigners on your debts. If other people signed to help you get a loan, and you discharge the loan in bankruptcy, the person(s) who signed may still be responsible for repayment of the loan.
• Overcome claims for new debts. A bankruptcy will not protect a person from debts incurred after the bankruptcy.