Bankruptcy can give some debtors a second chance

Many people avoid filing for bankruptcy out of shame and embarrassment around their financial circumstances, because they receive poor advice or because they're too proud.

- Rachel Kramer Bussel

But bankruptcy may be a prudent option to eliminate burdensome debt, save a home from foreclosure and end collection calls.

According to Ms Adrienne Hines, a bankruptcy lawyer, who has a popular TikTok account where she offers advice, many of her clients feel they have an obligation to pay off the debt themselves.

"It makes me so heartbroken to see people sit in their own misery thinking that it's their own fault," Ms Hines, 53, said. Creditors, she said, can run amok with unsecured lending, and bankruptcy is one solution that the US government provides to protect people.

The two bankruptcy options for individuals are Chapter 7 and Chapter 13 of the federal bankruptcy code. Chapter 7, also called liquidation, is the easier and more coveted option because you typically don't have to pay back any of your unsecured debt, Ms Hines said. However, you do have to meet an income limit for your household size based on your state; a means test is used to determine eligibility.

If you don't qualify for Chapter 7, you may be eligible for Chapter 13 bankruptcy, in which the debtor creates a plan that's submitted to a bankruptcy judge to pay back your creditors over a three- to five-year period.

The crucial advantages of Chapter 13, Ms Hines said, are that interest stops accruing on your debt and "a federal bankruptcy judge is there to protect you from your creditors" so they can't sue you, repossess your car or foreclose on your house.

There are downsides to filing for bankruptcy. Bankruptcy remains on your credit report for up to 10 years and can have an effect on your ability to borrow money. It can deduct up to 200 points off your credit score. Some of your non-essential assets can be sold to help pay off your debt. Even then, under the right circumstances, it can offer you a fresh start.