If You're Facing Bankruptcy

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If You're Facing Bankruptcy

The thought of filing bankruptcy may make you shudder, but the truth is that sometimes it is the best option financially. Considering bankruptcy is not something to be ashamed of, especially because the causes are often beyond your control. Huge medical bills, financial difficulties after a divorce or mounting debt due to unemployment can all cause irrecoverable financial difficulties.

If you have debt that's beyond your means to pay, you may end up digging yourself into an even bigger hole if you keep trying to handle it on your own. Although a bankruptcy is not something you should take lightly, it often allows you to move forward financially sooner than you would have been able to on your own.

Types of bankruptcy

In Chapter 7 bankruptcy, you liquidate all of your assets besides those considered exempt by your state of residency. The court distributes these assets to your creditors before writing off any remaining debt. However, be aware that you cannot discharge debts like student loans, tax liens, and child support in bankruptcy. In addition, you must qualify for Chapter 7 bankruptcy with a means test, which assesses your income and ability to repay your debts without filing bankruptcy.

The other major option is Chapter 13 bankruptcy, which involves a court-ordered payment plan of three to five years. During this payment period, you make monthly payments to the courts. At the completion of the term, the debts that remain are erased. A Chapter 13 bankruptcy allows you to keep control of your assets rather than liquidating them as would be the case with a Chapter 7 bankruptcy filing.

Impact on credit report

If all of that sounds too good to be true, it is because there's a major downside to bankruptcy. A bankruptcy stays on your credit report for up to 10 years, making it difficult for you to borrow money during that time. Chapter 7 bankruptcy will almost always stay on your credit report a full ten years, whereas Chapter 13 bankruptcy will sometimes drop off after just seven years.

Either way, you'll have a hard time getting a credit card or auto loan in the first few years after bankruptcy, and you'll pay high interest rates if you do manage to borrow. Getting a mortgage may require waiting longer, potentially even until after the bankruptcy drops off your credit report. The effects of bankruptcy on your credit score lessen over time, especially if you do get some form of credit and make consistent, on-time payments to rebuild a positive credit history.

Working with creditors to avoid bankruptcy

Before filing bankruptcy, contact your creditors to try to work out an alternate solution. Perhaps your creditors can reduce your interest rate or lengthen your repayment period to lower your monthly payments. Creditors also may postpone payments if you expect your financial troubles to ease soon, as may be the case if you are struggling with unemployment. Some creditors will even agree to accept a partial payment and erase the remainder of your debt.

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