Filing bankruptcy can be a stressful process especially when you are trying to understand the repercussions as well. Getting rid of stress before it overwhelms you is important, and can sometimes be completed through debt relief. Having an emergency fund can also be instrumental when facing a financial hardship.
Whether you have too much credit card debt or are going through a divorce, there are many reasons why someone may be seeking bankruptcy for help. In this article I will go through how bankruptcy and financial hardship can affect employees.
What is Bankruptcy?
Interestingly enough, I get the question, “What is bankruptcy?” quite a bit. The actual process of bankruptcy can be quite intimidating. Bankruptcy is a form of debt relief that allows a debtor to generally be released from an unsecured debt. It does matter which Chapter of bankruptcy the debtor is filing, as with Chapter 13 you may have to pay some/all of the unsecured debts back.
Chapter 7 Bankruptcy
The liquidation bankruptcy, or Chapter 7 Bankruptcy, is the process of wiping out your unsecured debts and potential unprotected high value assets. The protection of your assets are based on the bankruptcy exemptions by state.
Chapter 7 bankruptcy uses the Chapter 7 bankruptcy means test to determine the qualification. Once filed, it can last up to around 120 days until discharge. After discharge, you can immediately start rebuilding your credit.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as the “wage earners” bankruptcy, is the process of restructuring your existing secured and unsecured debt into a repayment plan over 3 to 5 years. The monthly Chapter 13 plan payment can consist of:
- Attorney Fee
- Administration Fee
- Trustee Fee
- Mortgage
- Auto Loan(s)
- Secured Loan(s)
- Disposable Income
Impact of Bankruptcy
Filing for bankruptcy generally is not a simple decision, there are a lot of factors to consider including negative impact. When it comes to filing Chapter 7 or Chapter 13 bankruptcy, you can see a high negative impact on your credit score. Regarding credit report, Chapter 7 bankruptcy remains on credit report for 10 years, while Chapter 13 bankruptcy remains on credit report for 7 years.
As I stated earlier in the article, you can start to rebuild your credit immediately after discharge from Chapter 7. Rebuilding your credit after bankruptcy can be a tedious process, however, it is very doable.
Depending on the field some employees can jeopardize their job when filing for bankruptcy. There are some fields of work that won’t allow clearance or prevent them from succeeding in interviews down the road because of bankruptcy. However, sometimes financial hardships can affect an employee so much that bankruptcy is their last chance to become debt free.
Employees Facing Financial Hardship and Alternatives to Bankruptcy
Of course there are alternatives to bankruptcy, however, sometimes debtors don’t have many other choices. In order to file a Chapter 7 bankruptcy, you need to qualify. Qualification is based on the household annual gross income and the state you reside in. For example, let’s discuss alternatives when someone doesn’t pass the bankruptcy means test.
Sometimes filing bankruptcy is not an option an employee or a debtor wants to consider. If you are facing a financial hardship currently and feel overwhelmed about the idea of filing bankruptcy, here are some alternatives to consider:
- Debt Settlement
- Debt Consolidation
- Debt Management
Debt settlement is the process of negotiating with the creditors to bring down the total amount of unsecured debt owed. Very similar to debt settlement, debt management is negotiating the interest rates rather than total amount. Finally, debt consolidation is the process of taking low interest loans out to consolidate the unsecured debt into a payment plan.
Pros and Cons for Employees Enrolling in a Debt Settlement Program
Debt settlement is a legitimate debt relief option that can help employees keep their job and become debt free. The general process of settling the debt consists of either working with a debt settlement company or doing it yourself. While this process can be extremely beneficial there are pros and cons to consider:
Pros of Debt Settlement
- Potential Significant Savings Compared to Chapter 13
- Steer Clear of Bankruptcy
- Generally Less Credit Impact than Bankruptcy
Cons of Debt Settlement
- Medium Credit Impact
- Debts Fall Behind Until Negotiated
- Risk of Potential Lawsuit
Like bankruptcy, there may be some employers that don’t want their employees enrolling in a debt relief program like debt settlement. If that is the case, make sure to confirm that before enrolling in a program like this.
Potential Next Steps to Face a Financial Hardship
Employees facing financial hardship can be quite difficult. Financial hardships can be from a loss of job, increased expenses, or even divorce. There are quite a few reasons that someone may be in the midst of a financial hardship which can sometimes mean that there are a few ways to handle the situation:
- Chapter 7 or Chapter 13 Bankruptcy
- Debt Settlement
- Debt Management
- Debt Consolidation
- Debt Payoff Planning
There are many other ways to handle financial hardship, as there are certain circumstances that can be taken care of through selling assets, etc.
Conclusion
Whether you are an employee at a large firm or small business, financial hardships can have a huge impact. Fortunately, there are different ways to handle these situations. You either try to work with the creditor to bring down the total amount of debt you owe or reach out to a company to do so for you. If you are in a position where resolving the account won’t offer the assistance you are looking for, filing bankruptcy may be able to offer the help you need.