For a lot of people, the term “bankruptcy” refers to a trick: People rack up immense debts they can’t hope to pay back, and when justice begins to close in on them they can jump in the escape pod marked Bankruptcy and wriggle out of the consequences, only to repeat the cycle. This, of course, isn’t true, and as bankruptcy rates skyrocket during the worldwide economic slowdown we’ve been experiencing, more and more people are realizing that bankruptcy serves a legitimate purpose in the world. To put it in dramatic terms: Bankruptcy allows civilization to exist, because it gives us rules and structure for dealing with financial ruin.
The Bad Old Days
In the past, an inability to pay bills was dealt with via a destructive and unrealistic hostility. People were even thrown into jail because they failed to pay their bills, and even where debtor’s prison didn’t exist, there were usually endless rounds of punishments that sank people into a hole they would never crawl out of. While that might seem like justice to some folks who have smugly never missed a payment in their lives, the fact is it was totally harmful to society: The debtor had no chance not only of paying off that specific debt, they had no chance to pay off other debts either. Punishment therefore spread like a cancer to all the interested parties.
The Modern Method
In contrast, bankruptcy today allows for an orderly and fair review of the debtor’s assets and debts, and as many debts as possible are made whole. Lenders are able to negotiate to get at least some minimum amount of their principal back, and the debtor is allowed to rebuild their lives and their finances not only after their debts are discharged, but during the process as well – which benefits everyone.
More and more people are realizing this – more than a million people filed for bankruptcy protections under either Chapter 7 or Chapter 13 in 2012 and 2013. The two main types of bankruptcy differ slightly in the details of how they work, and a professional should be consulted before making any decisions involving bankruptcy. But if you are at a point where paying your debts has become impossible, it’s a better choice to alert your creditors and work with them under a legal structure than to deny what’s happening and let chaos rule the day – as it surely will if you don’t file.