What Is Bankruptcy and When Is It My Best Option?
What Is Bankruptcy?
People file for Bankruptcy when they are unable to repay their outstanding debt. Bankruptcy begins with a petition that is signed by the debtor, or sometimes one’s creditors. It is granted by the federal court, or state. At this point, the debtor’s assets are measured and used to repay as much of the outstanding debt as possible.
Bankruptcy is a chance for a fresh start, because it wipes out most or all debt obligations. However, bankruptcy will have a negative affect on your credit score, and stay on your credit report for up to 7 years. Additionally, bankruptcy can prevent or delay foreclosures on a home or car. Because of the long lasting consequences, it is often used as a last resort.
Though there are 6 types of bankruptcy (Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and Chapter 15), Chapter 7 and Chapter 13 are most commonly filed.
Chapter 7 bankruptcy aids in clearing unsecured debt. Most debt under Chapter 7 bankruptcy is dischargeable. This option is ideal for people who would like quick relief from creditors.
Chapter 13 bankruptcy uses one’s income to pay off the debt owed to creditors. People with too low of an income can sometimes create a repayment plan with their creditors. With Chapter 13 bankruptcy, court fees, homeowner’s association or condominium fees, and marital debt, are all eligible for discharge.
How Long Does It Take To Get Out Of Debt?
Typically, Chapter 7 bankruptcy can resolve most of one’s debts in 3-6 months. The average time period is 3-4 months, but can take longer in complex cases. With the shorter time period for Chapter 7 bankruptcy, one can start trying to rebuild their credit sooner rather than later.
Chapter 13 bankruptcy can take 3-5 years. The time starts as soon as the case is filed. In most cases, Chapter 13 bankruptcy only stays on one’s credit report for an additional 2-4 years after completion.
How Does Bankruptcy Affect Credit Scores?
Chapter 7 and Chapter 13 bankruptcy have a negative impact on credit score. However, people can rebuild their credit after the bankruptcy process is complete.
Right after bankruptcy, people should expect to receive credit offers with high interest rates and low limits. To rebuild credit faster, we recommend getting a secured debt credit card.
Even though bankruptcy hurts credit scores, not paying debt payments and going into collections also negatively impacts credit scores. Those that responsibly handle their credit after the bankruptcy process is completed, can increase their credit scores to a decent number.
How Do You File For Bankruptcy?
Before filing, 180 days of credit counseling is typically required. The counseling must be with an approved provider from the United States Courts website. After this, a lawyer is hired to help file the claim. While legal help is not mandatory, it is strongly recommended. The bankruptcy filing process can be extremely costly, and has to be completed through the federal court. Each Chapter of bankruptcy has a slightly different filing process.
Bankruptcy is a way to start with a clean slate. However, because of long lasting negative effects, it is an option to be used as last resort. If you’re not sure about bankruptcy, we recommend trying debt settlement first.