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What is Bankruptcy and When Should You Consider It?
While bankruptcy may sometimes seem like your only option, we at CreditGuard try to shy away from bankruptcy as much as possible. While bankruptcy may offer relief for some people, there are usually other options available. If you’re considering filing for bankruptcy, be sure to read what your options are below.
There are two types of personal bankruptcy, and it’s important that you understand what each includes:
Sometimes referred to as “fresh start” bankruptcy, or “liquidation,” this option lets you cancel all your debts except mortgages, car payments, student loans and any unpaid child support. You can file for Chapter 7 once every 6 years, and it can remain on your credit report for 10 years.
To qualify for a Chapter 7, you must first prove your income is less than the median for your family size and state. If your income is higher, you may be forced to file a Chapter 13.
Also known as “reorganization,” or a “wage earner plan,” Chapter 13 bankruptcy allows you to keep your valuable property, such as your home or car, which in some cases you would otherwise have to forfeit due to missed payments. Filing for a Chapter 13 means you’ll be forced to pay back your debts between three and five years, with your regular monthly payments divided evenly.
Chapter 13 usually lasts for 3 to 5 years and requires that you have a regular source of income. Chapter 13 remains on your credit report for 7 years.
Why Avoid Filing for Bankruptcy?
While bankruptcy may seem like an easy solution out of debt, it’s loaded with a number of consequences. Here are just a few downsides to filing bankruptcy:
- Bankruptcy DOES NOT clear all your debts
- Your credit score will be severely affected
- Through Chapter 7, you can lose all your assets
- Chapter 13’s repayment plan can take up to five years to complete
- Tax refunds and earned income credits are not exempted when you file for bankruptcy
Even in hard-hit financial crises, bankruptcy should be your last option. Instead of filing for bankruptcy, take a look at our Credit Counseling page or give us a call to see what other options are available.