4 Things that Can Go Wrong with a DIY Bankruptcy

A DIY bankruptcy, or do it yourself bankruptcy, can provide you with the ability to completely pay off your debts without getting the courts involved. Essentially, you put yourself through the bankruptcy process and liquidate assets to pay-off loans. Instead of a judge ordering you through the process, you retain control. The bankruptcy will never appear on your record because it was not official. While this may sound intriguing, remember that bankruptcy is a complicated process, and a number of things can go wrong.

Settling too High

Bankruptcy allows you to pay off your debt in one lump sum. Each lender will negotiate this sum individually. They are willing to work with you and avoid court because they will often get less if the case goes to court. This means they will try to settle with you for a higher rate than they believe they could attain through a court-ordered process.

 Settling for amounts that are too high will prevent you from gaining the benefits of the bankruptcy. You may not have the cash to meet the settlements, or you may have to sell off more of your assets than you would like. Bankruptcy courts will usually be able to negotiate lower amounts, and you could potentially protect more of your assets as a result.

Prioritizing Incorrectly

Your loans are prioritized legally whether you realize they are or not. The structure of the loan has something to do with the order of importance. For example, federal liens are always highest priority, followed by loans from senior lenders like banks or mortgage companies. Subordinate lenders, like private investors, doctors or utilities companies, will be last in line to get their payments. During the DIY bankruptcy process, you may feel obligated to pay off your personal debts before your senior loans. If you borrowed money from a friend or family member, you may feel drawn to pay this loan off even though it is not a senior debt.

Over-Protecting Assets

Bankruptcy court will forcefully sell off your assets. While this process is hard, it is sometimes the only way to let go of assets you care about. It is hard to remove the emotions involved in liquidating the assets you have spent years building up. If you do not think you can force yourself to sell assets because you will be too emotionally involved in the process, you may need a court to step in and take control for you. 

Avoiding Legal Protection

Bankruptcy is not all bad for the bankrupt person. In fact, it does provide a number of legal protections against collections agencies or foreclosure specialists. These people cannot come seek your assets once you are under the protection of a bankruptcy filing. Without the legal protections, you are vulnerable to these companies. You may spend months avoiding a company that is seeking to seize your car or your home.

You will have to negotiate with these companies independently to gain the time you need to pay these debts. Some lenders will be kind about working with you, but many will go to extremes to recover their funds immediately.

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