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Bankruptcy as a Freedom Tool

Bankruptcy has often been considered to be the ultimate shame and crowning mark of failure. Yet for millions of people out of their financial depth, bankruptcy should actually represent a path out of a financial nightmare. Bankruptcy is not reserved for deadbeats, failures, or losers. Instead, it is for honest individuals who realize that the only way out is starting over.

There are so many paths into financial distress. An unexpected medical emergency, job loss, divorce, car accident, or even identity theft can ruin the finances of otherwise financially savvy individuals. Then there are credit cards – the average American has $15,799 in credit card debt according to, and this debt is often topped with an average of $24,000 in student loans and more than $100,000 in mortgage debt. Add in car payments, insurance premiums, and basic living costs for a truly frightening picture of the average household balance sheet. After careful consideration, bankruptcy could offer a chance to be free of crippling debt obligations and start over with a life lesson learned. Though often classified as an extreme measure, by understanding bankruptcy, it is possible to determine if it is actually a viable option for you.

Who Is Bankruptcy Good For?

Bankruptcy may be an option (albeit extreme) for individuals or families who are living within their means but unable to keep up on debt. Before you consider bankruptcy, you should try to see if there are ways to to renegotiate your debt, either through credit counseling or debt reduction programs offered by such people as Dave Ramsey or Gary North. Bankruptcies will make it difficult, if not impossible, to take out new debt for seven years after a filing, so if you think you’ll want to borrow money in the future for a car or house, you may want to consider other alternatives. You are going to have to learn to be able to live on your current income before you hit the bankruptcy reset button. It is not meant to be pressed continually, and if bad choices have brought you to this place financially, you’ll need to learn how to avoid them in the future.

What Does Bankruptcy Really Do?

Bankruptcy functions as a stop and restart button on consumer debts. This includes credit card debt, car payments, mortgages, and other common forms of personal debt. By filing bankruptcy, you are essentially ending your relationships with your creditors, making it so they no longer chase you for payments and you no longer use them for new debts.

Bankruptcy does not put your name in the paper or ruin your ability to get another job. It is not a condemnation of you as a person. Instead, it is a private financial decision that can be used strategically as a way to take control of your life and your family’s future. Like any business, bankruptcy is a chance for restructuring and renewal of your situation.

You Don’t Lose Everything in Bankruptcy!

Many people mistakenly think that bankruptcy means that you lose everything. This is not true! A number of personal assets are protected in bankruptcy court, including furniture, retirement accounts, inexpensive vehicles, and basic homes. The exact protections vary slightly between states and in federal courts, so be sure to check the rules in your area.

At a federal level, it is extremely important to note that retirement accounts are nationally protected up to $1,171,650 per a 2005 Supreme Court ruling. This includes 401(k) accounts, pensions, disability, IRAs, and Social Security. For this reason, many lawyers say the worst thing you can do when you’re in debt is borrow from your retirement accounts to pay down creditors – that money is protected from seizure in a bankruptcy, so giving it up voluntarily often amounts to personal financial suicide.

Costs vs. Benefits of Bankruptcy

Discounting the emotional experience of bankruptcy, there are hard costs of bankruptcy that should be weighed against the potential benefits. For example, filing bankruptcy costs $2,500 on average nationally. Thus, you want to be sure you will receive more than $2,500 in debt relief by filing.

Student loan debt is generally not possible to discharge in bankruptcy except in very limited circumstances, so if this is your primary form of debt, bankruptcy is not particularly useful. On the other hand, medical debt and credit card debt can be removed through bankruptcy, making this a major freedom tool if you carry high levels of unsecured debts like these.

Concluding Thoughts

Bankruptcy is a tool that can be used to set you and your family free from high levels of debt. While it can be an intense emotional experience, weighing out the hard numbers can prove that it is the right choice for your present situation. Instead of struggling indefinitely and being a prisoner of debt forever, put aside any imagined stigmas for bankruptcy and take a second look at this potential path to reclaiming your financial freedom.

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