772,646 bankruptcy filings were made for both personal and business cases as of March 2019.
Bankruptcy rates in America have been falling from their high peak following the 2008 financial crash.
For example, the U. S. Court System Administration Office registered 936,795 bankruptcy filings in 2014 which is a marked reduction to those in 2019.
When your best-laid plans personally or business-wise go up in smoke, bankruptcy can sometimes seem like the only way out. But is that really the case or are you reacting to panic?
Before you decide to file for bankruptcy check out these signs to know when you should take that course of action
When Your Creditors Are Suing You
When you owe money and fail to pay it after an extended period despite attempts at recollection by the creditor, it will be turned over to a collection agency.
If upon further protracted attempts at recovery, the collection agency can’t get you to pay up they may decide to sue you.
Fighting the lawsuit is one option open to you. However, it will cost you a lot more money and should you lose, you will be deeper in the hole.
In light of this possibility, many people end up filing a bankruptcy petition. When you file a petition for bankruptcy, the court issues an automatic stay.
What that means is that your creditors can no longer come after you for repayment. That includes filing a lawsuit against you for it.
The stay will remain in force for as long as your case is not dismissed or discharged. However, there are some debts that will not be forgiven despite your filing for bankruptcy.
These include court judgments, child support, alimony, student loans, and back taxes.
When You Can’t Honor a Personal Guarantee
A personal guarantee is a legal pledge given by an individual to repay the credit a business receives.
To give a personal pledge you need to be a partner or executive in the business that will receive the credit.
There are various reasons that might call for you to issue a personal guarantee.
Maybe your business has been struggling and you need a top-up loan to keep the light on and doors open. Or it could be that you are a startup looking to secure capital and get the business off the ground.
No matter what scenario you find yourself in, you will most likely need to sign a personal guarantee with banks and alternative lenders.
If you sign a personal guarantee on any credit, you can and will be held responsible as the business owner. Even if you own a limited liability corporation you will still be personally liable.
If a personal guarantee is driving you to consider bankruptcy talk to a knowledgable bankruptcy attorney. They will help you figure out the most optimal way to protect your personal finances.
When You’re Facing Foreclosure
There has been a reduction in the rate of foreclosures in recent years. Despite this bit of sunshine, many American families are still losing their homes to their lender.
If you are struggling to make payments on your mortgage and foreclosure seems possible, applying for bankruptcy can help save your home.
When you file for chapter 7 bankruptcy, your home could be seized and sold to pay off your debt. That’s because chapter 7 (and 11) bankruptcy’s focus is liquidation.
However, should you file for chapter 13 bankruptcy, you may be able to keep your assets and create a repayment plan.
A chapter 13 bankruptcy is not a magic wand that will simply reset your debt load to zero. There are conditions that come with it of which you must adhere to.
Once your chapter 13 bankruptcy application goes through, the court will design a repayment plan for your delinquent debt.
Traditionally, this has been over a three to five-year window. The court will look at factors such as your secured and unsecured debt and your income to determine the most optimal repayment plan.
Once a chapter 13 bankruptcy is underway, debt collectors are not allowed to contact you any further in light of the repayment plan.
When You’re Facing a Long Term Cash Flow Issue
Consistent cash flow crises are usually a telltale sign that bankruptcy might be in a company’s future.
With that said it takes more than a couple of late paying customers or several missed payments to vendors.
Whenever cash flow problems arise it is always wise for you to nip them in the bud. An immediate remedy will bear fruit before too long.
On the contrary, when you fall behind on several payments with different suppliers your business might be past the point of correction.
If you are behind on these payments for more than six months and don’t see any way out then you should begin considering bankruptcy.
When Your Business Structure Threatens Your Personal Assets
When you are an entrepreneur the structure of your business has the potential to pose some personal liability risk to you.
For example, if you own a sole proprietorship or are part of a partnership, there is no distinction between you and the business.
According to the law, your assets can be used to settle any debts that the business incurs.
When any creditor decides to call in their debt, your house, car, retirement accounts, and even your children’s college fund are all up for grabs.
When unforeseen or insurmountable business debts in such businesses lead to insolvency, you need to begin looking at bankruptcy.
In the case of a limited liability company, there are circumstances that can allow a court to waive your personal indemnity.
If, for example, you end up mingling your business and personal finances and fall into debt, the court can strike down the corporate structure.
As a result, you will end up being held personally liable for your corporation’s debts with bankruptcy being the only way out.
Don’t File for Bankruptcy Unless It Is Your Only Option
Many businesses and people file for bankruptcy every year in the U. S. Although there are fewer cases now compared to the 2008 recession, some people and entities still consider it their only option.
However, before you file for bankruptcy, make a correct determination that you indeed need to do so.
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