According to recent statistics, 1.3 million people in the United States filed for personal bankruptcy last year. For most filers, bankruptcy is a way to deal with substantial debt problems. But it also has serious consequences that can affect your finances for years to come.
While a bankruptcy attorney is the best place to get advice about whether a bankruptcy is right for your situation, the following tips can help you better understand what bankruptcy involves:
There are two main types of personal bankruptcy -- Chapter 7 and Chapter 13. Each one has different qualifications and serves a different purpose.
Chapter 7 bankruptcy allows you to discharge (or eliminate) eligible debts once your own assets are used to help repay your debts. In order to qualify for this type of bankruptcy, you must have liquid assets, such as a checking account, savings account, or certain investments. These are converted to cash and used to repay your debts. Your debts are discharged after all of your liquid assets are used. Your non-exempt property can also be seized and used to repay your creditors.
Chapter 13 bankruptcy involves the repayment of your debts through a payment plan over the course of 3-5 years. Instead of paying multiple creditors, you make a payment for all your debts to the bankruptcy court. The court then distributes your payments among your creditors.
Both Chapter 7 and Chapter 13 bankruptcy require credit counseling before your debts are discharged. This counseling helps you learn how to manage your money and use credit wisely so you can avoid debt problems in the future.
Additionally, bankruptcy also protects you from collection activity. This means that by law, your creditors are no longer allowed to attempt to collect money from you via letters, phone calls, or wage garnishment.
Not all debts are covered in bankruptcy. Your bankruptcy plan, which is drawn up by your attorney, will detail what debts will be eliminated once your bankruptcy is over. The most common debts discharged in a bankruptcy include:
Debts that are not included in either type of bankruptcy include:
Bankruptcy is the worst thing you can do to your credit rating. The actual impact on your credit score varies depending on factors such as your current credit score, but typically, most people see their credit scores drop between 150 and 250 points.
In addition to a lowered credit score, the bankruptcy will show up on your report for years. Chapter 7 bankruptcies remain on your credit report for 10 years, while a Chapter 13 will stay on your report for 7 years.
Keep in mind that even though the bankruptcy will stay on your report, it doesn’t mean you can’t start to rebuild your credit. Most creditors will loan you money even with the bankruptcy on your record if you can establish a good record of repaying your debts after the bankruptcy. However, interest rates are likely to be much higher.
A bankruptcy can be a fresh start and a way out of your debt problems, but it also has a drastic impact on your finances and your credit. A qualified bankruptcy attorney can help you decide whether bankruptcy is the right option for you.