Some people view bankruptcy as the ultimate failure, but others realize that bankruptcy can give them a brand-new start and an opportunity to manage their financial life responsibly in the future. Entering into bankruptcy is not a decision that should be taken lightly and anyone making the decision should consider all of their options before formulating a plan. Here are some things to think about when considering bankruptcy.
Bankruptcy Choices
If you live in the United States, your bankruptcy choices are Chapter 7 bankruptcy protection or Chapter 13 bankruptcy protection. Chapter 7 is generally used by people who have few assets and a very limited ability to work out a repayment plan for their existing debt. Individuals that file for Chapter 7 emerge from bankruptcy quickly, as most of their assets are turned over and sold to repay their debts.
Chapter 13 bankruptcy protection is generally used by debtors that own significant assets, such as a car and a house, and has ongoing sources of income. Chapter 13 allows the debtor to keep most of their assets and requires lenders to work with the courts to come up with a modified repayment plan. A Chapter 13 bankruptcy can last for years until the debts are completely paid off.
Impact On Your Credit Score
Bankruptcy has major impacts on your credit score and on your ability to obtain credit in the future. Both types of bankruptcies last for 10 years on your credit report, but a Chapter 7 filing can have a worse effect on your credit score. After filing for bankruptcy, many lenders will choose to not do business with you until the bankruptcy information has been cleared from your credit history, so save money and position yourself to where you will not have to use credit for those years.
Avoiding Bankruptcy
In many cases, there are ways to avoid bankruptcy and work out your current debts. You may be able to consolidate your debts for a lower interest rate or negotiate with your creditors to reduce the amount that you are required to pay. Credit counselors and companies that specialize in debt relief will have a number of options available that may help you reduce the amount of debt you are carrying, but you will be charged a fee for accepting their help. Examine all of your options before making a final decision because the decision that you make can have a significant impact on your finances for years to come.