Millions of Americans have declared bankruptcy—and with credit card and school loan debt increasing, chances are that the number of bankruptcies in America will only go up. If your debts are simply unmanageable, bankruptcy may be your best option. However, there are lasting consequences as well—and entering bankruptcy shouldn’t be considered as anything other than a last option. Below are some of the facts you’ll need to know about bankruptcy.
Types of bankruptcy: Chapter 7 vs. Chapter 13.
Chapter 7 is what most people typically think of when they think of bankruptcy. Basically, if you declare Chapter 7 bankruptcy, all of your material assets are gathered and sold off to your creditors. Once that happens, your debts are more-or-less erased. The situation is a bit more complicated than this, in that you can save some of your assets from being sold off if they are deemed essential to pursuing your line of work, and some funds can be considered exempt in some states. You also cannot erase liens, even though you can erase debt—so you will be liable for some repayment if you have a lien on a mortgage, for example. For most people, Chapter 7 is the preferred type of bankruptcy, because it extinguishes the bulk of a person’s debt.
Chapter 13 bankruptcy is usually less common than Chapter 7; under Chapter 13, you are expected to pay off some or all of your debt. Under a Chapter 13 bankruptcy, you work out a plan with the Court to pay off your debt over a three- to five-year period. Once that period is passed, your debts are cancelled. The amount you agree to pay under Chapter 13 must exceed the amount your creditors would get if you liquidated your assets under a Chapter 7 bankruptcy, and you also must show that this payment plan is feasible given your income—and prove to the court that all of your disposable income is being applied to your debt. While Chapter 13 bankruptcy is typically less desirable for most people considering going bankrupt, you may have to prove that you can’t afford Chapter 13 before you’re allowed to file for Chapter 7.
Benefits of going bankrupt.
There are definitely pros to going bankrupt, which is why many people do it—although these advantages vary depending on whether you’re filing under Chapter 7 or 13. Here’s an overview of the pros.
Your debt is cancelled. At least under Chapter 7, you’re given a fresh start to begin to repair your finances without impossible debt burdens to contend with. This option gives many people freedom they wouldn’t ever have without bankruptcy. Even better, you’ll be protected from aggressive debt collectors, and your attorney will negotiate with them on your behalf during the bankruptcy process.
Some of your assets are protected. You won’t wind up homeless if you file for bankruptcy—many states allow you to shield your home and car, although these laws have become more stringent since Chapter 13 was introduced.
It may actually improve your credit record. You can’t file for bankruptcy again for six years after you file the first time. This means that creditors you approach for loans may realize that you can’t file for bankruptcy again anytime soon, because you already have. Believe it or not, this may actually improve your chances to get some loans.
Disadvantages of bankruptcy.
That said, declaring bankruptcy will have serious, long-lasting consequences. If you’re seriously considering bankruptcy, here’s an overview of what you’ll have to live with.
Difficulty getting loans. You will probably be able to get loans and credit cards if you declare bankruptcy—but it’s an excuse for lenders to charge extremely high rates. This isn’t necessarily bad, since debt is what got you in trouble in the first place. But people with a record of bankruptcy can almost never get mortgages—at least not within five years of their bankruptcy date.
A stain on your record. Your loan difficulties will continue for ten years, as that’s how long a bankruptcy stays on your credit report.
You’ll still have some debt. You can’t get away from back taxes or student loans by declaring bankruptcy. You’ll still be required to pay those under Chapter 7 as well as Chapter 13 bankruptcy.
The decision to declare bankruptcy is often agonizing—and should only be considered as a last resort. But if you truly can’t pay your debt at this point, it may be your best or only option. Rest assured that you will survive a bankruptcy—especially if you’re young and have not accumulated much in the way of assets yet. Make sure you give yourself as much time as possible to consider this decision, and get a lawyer’s advice if you can.