When your financial situation starts to spiral beyond your control, and your debts pile up faster than you can pay them down, you are left to decide if you are going to file for bankruptcy. What, which kind of bankruptcy is right for you - Chapter 7 or Chapter 13?
A recent piece published in The Atlantic describes a phenomenon it dubs “the bankruptcy feedback loop.” This is the cycle of impoverished individuals filing for bankruptcy to eliminate their debts only to find themselves back in debt not long after, considering filing for bankruptcy again.
In July of 2017, dressmaker Alfred Angelo filed for Chapter 7 bankruptcy after more than 75 years in the bridal dress business. The 60 Alfred Angelo shops were shuttered immediately. This came as a surprise to dress retailers and the brides who had ordered Alfred Angelo gowns through them, some of whom are now scrambling to find out if they will receive their dresses or if they will have to get new gowns at the last minute.
Chapter 7 bankruptcy is known as liquidation bankruptcy because it involves the liquidation of the filer’s non-exempt assets to make a profit, which is then used to repay the filer’s creditors. Naturally, nobody wants to have his or her assets liquidated, but when an individual files for Chapter 7 bankruptcy, his or her creditors need to recoup at least some of their money.
Although each bankruptcy case is unique, every filer must eventually decide which bankruptcy chapter is best for their particular situation. Chapter 7 and chapter 13 are the most popular forms, each offering different bankruptcy options. The American Bar provides a detailed comparison.
Many people assume that debt is inherently bad. The truth, however, is that debt and credit can be tools that allow individuals to live more comfortable, fruitful lives. Loans help people buy homes and attend college, and credit can help those who find themselves in temporary financial hardship. Unfortunately, poor financial management and unexpected circumstances can cause debt to spiral out of control. When this happens, bankruptcy might be a viable option.
Debt is a familiar reality to many Americans. However, contrary to popular perception, debt is not inherently bad. When people understand how to manage debt responsibly, they can improve their credit score and acquire loans. Responsible debtors have more opportunity when it comes to buying a home or starting a business. Unfortunately, unexpected circumstances can put debtors in a position where they cannot make payments. An injury or a natural disaster, for example, can produce steep expenses, and in these cases, one viable option may be filing bankruptcy.
Stockton and Detroit have succeeded in emerging from bankruptcy filings, but other cities could have similar issues in the near future. These medium-sized cities in California and Michigan struggled with, among other things, an underfunded pension system. There was simply not enough tax revenue to pay these obligations. One observer called Illinois the “basket case” of pension cases.