There are some people who will argue that filing for bankruptcy is the worst thing anyone could do. There are others who look at those who file for bankruptcy as being irresponsible. For financial professionals like Suze Orman, however, filing for bankruptcy is the responsible and sensible thing to do when someone is truly overwhelmed by debt.
Whether it is filing for Chapter 7 or Chapter 13 bankruptcy, Orman recommends taking the legal path when a person’s debt is out of control. If he or she just stops paying, there could be very serious consequences, including liens against the individual’s home or wage garnishment. Instead, Orman suggests exploring the different types of bankruptcy and potentially filing.
The two most common types of bankruptcy are Chapter 13 and Chapter 7. Chapter 13 is very similar to a consolidated loan in which a person can adjust his or her debt. The individual keeps his or her property but is given more time to pay down debts. As part of a Chapter 13 plan, however, an individual must make all his or her mortgage payments.
Chapter 7 bankruptcy, on the other hand, is likely what most people think of when they hear “bankruptcy.” Certain assets must be sold, but most of an individual’s debts will be discharged. Creditors will no longer be able to take legal action against the individual for unpaid debts. Fortunately, there are certain types of assets that are considered “exempt,” meaning that the person filing for bankruptcy can keep them.
Which type of bankruptcy a person files for should come after careful consideration, but making the decision to file in the first place should not be seen as anything more than taking responsibility of insurmountable debt.
Source: CNBC, “The good thing about bankruptcy,” Sakina Spruell, Oct. 21, 2013