Talking about bankruptcy is tricky business. In times of dire financial need, some view bankruptcy as a relatively easy way of dealing with aggressive creditors. Others view the bankruptcy label with something of a stigma — a scarlet letter symbolizing one’s personal and professional failures. Between such wildly contrasting viewpoints, it can seem almost impossible to separate objective facts from subjective opinions. So, to clear the air, let’s tackle the question at hand – is it ever a good idea to declare bankruptcy?

Changing the Bankruptcy Narrative

First things first, when looking at bankruptcy, it helps to avoid terms like “good” and “bad.” Instead, it’s more productive to ask whether bankruptcy is the appropriate option for your particular financial situation. It is a process sanctioned by the federal government, and it exists for a reason. Of course, that is never a situation we want to find ourselves in, but if we are there, then bankruptcy — while not exactly a “good” option — might just be the right one.

The Bankruptcy Process

For individuals considering the route of bankruptcy, there are two primary types: Chapter 7 and Chapter 13.

Chapter 7

Chapter 7, commonly known as “liquidation bankruptcy,” is the simpler option of the two and will discharge most kinds of unsecured debt over a three-to-four-month period. (Note: certain debts, such as child support, alimony, and court-appointed penalty fees will not be discharged). In return, however, you will be required to hand over all assets not protected under state and federal laws to the bankruptcy estate. They will then be sold and the proceeds will be distributed across your creditors.

While this process can be difficult, not all is lost. Specifics will vary from state to state, but chances are you will be able to keep necessities such as clothes, a car, and household furnishings provided their net worth is below the maximum equity you are allowed to have. And although foreclosure is certainly a possibility, in some cases, you may even get to keep your home.

The idea behind this is simple: at the conclusion of the process, the bankruptcy estate wants to leave you just enough to make a clean start. For this reason, filing under Chapter 7 can be a viable option for many households with unmanageable debt and minimal assets.

Chapter 13

Unlike Chapter 7 bankruptcy, filing under Chapter 13 does not erase your unsecured debt. This alone causes many individuals dealing with a heavy financial burden to look at this option with a wary eye. That, however, could be a costly mistake.

Instead of erasing your debt, Chapter 13, known as “wage earner” bankruptcy, is a payment restructuring program designed to pay off debts on your own, with the protection of the bankruptcy court. Under Chapter 13, you do not have to transfer any assets to the bankruptcy estate. If you are behind on a mortgage or car loan and wish to catch up, this type of bankruptcy will give you the means to get back on track with clear, manageable deadlines over three-to-five years. At the end of the process, you will keep your property just as you would have under normal circumstances.

For those with significant amounts of debt not eligible for discharge under Chapter 7, Chapter 13 allows you to bundle the majority of these into your repayment plan. If excessive student loans or tax obligations are the primary causes of your financial hardship, Chapter 13 bankruptcy can be the best option for you.

When deciding between these two, also keep in mind that not everyone is eligible for Chapter 7 bankruptcy. If you have too much disposable income or do not meet the criteria determined by the bankruptcy court, Chapter 13 might be your only choice. For details relating to your specific situation and available options, you can seek out the advice of a bankruptcy attorney, many of whom offer free consultations.

Life After Bankruptcy

It cannot be stressed enough that, as hard as it may be, bankruptcy is not the end of the world. Life goes on. In just a few short years, you will be able to start rebuilding your credit to where it once was. While bankruptcy can be a difficult road, it might be one worth taking when necessary.

Is bankruptcy good for you? It’s hard to say. But is it good that bankruptcy exists in our society? Absolutely.