Bankruptcy as a Financial Protection Plan

Everyone is concerned with financial protection and with making sure they have a handle on their money. One option that some people may consider as a fallback method of financial protection is bankruptcy. Bankruptcy is the chapter of federal law in the US that ensures that individuals are not forever haunted by debts they cannot pay. Under the bankruptcy code, it you meet certain qualifications, you are entitled by law to protection from creditors and some measure of relief from debts. However, as financial protection plans go, bankruptcy is a very poor choice for a number of reasons.

Bankruptcy and Financial Protection?

Bankruptcy is a poor financial protection plan because:

• You may not be eligible to file chapter 7, or total liquidation bankruptcy under changes to the bankruptcy code that occurred in 2005. Under the new rules, you have to pass a means test in order to be able to file for a chapter 7. The test involves proving that you either make less than the state median or that your income isn't enough to pay your debts and provide a reasonable quality of life. If you don't pass this means test, chapter 7 is out and you have to file chapter 13. Under a chapter 13 bankruptcy, your debts don't just go away- you have to enter into a repayment agreement that lasts between three and five years and that is overseen by a court trustee
• Even if you are eligible to file chapter 7, you will lose many of your assets. With the exception of bankruptcy exemptions for things like a limited amount of home equity and the "tools of the trade" that you need to do business, most of your stuff is taken and sold in a bankruptcy sale and the proceeds go to your creditors. True, most debts are forgiven after the proceeds from the sale are paid- but it is a pretty poor protection financial plan that requires you to turn over a lot of your stuff. 
• Bankruptcy will do serious damage to your credit score

There are other financial protection plans you should consider, such as an emergency fund, that might be better than planning on using bankruptcy to deal with debts.

Getting Help

If you are facing bankruptcy, you should strongly consider speaking with an experienced bankruptcy attorney. Your lawyer can explain all of your options based on your income and financial situation and can help you throughout the process of filing the legal papers required to go bankrupt.