When Should I File for Bankruptcy?
Bankruptcy exists in America for many good reasons. But the decision to file for bankruptcy in the face of crushing debt is a decision that most, including myself, view – again with good reason – as the option of last resort. Let’s take a closer look at bankruptcy this week.
Types of bankruptcy
First, a basic primer: There are two types or “chapters” of bankruptcy that apply to individuals: Chapters 7 and 13. In a Chapter 7 bankruptcy filing, almost all debt is written off while A Chapter 13 filing reorganizes your debt so that you can pay off some of it. Chapter 7 bankruptcies require a means test to determine that you really don’t have the funds (or the means) to pay off your debt. A resource test is not technically required in a Chapter 13 dossier (more details below).
It is important to understand that even in a Chapter 7, not all debt is paid. Taxes, student loans, secured debts, child support or alimony are at the top of the list of debts that usually cannot be wiped out by bankruptcy.
When and how to deposit, and what to expect
While technically not a requirement, making the decision to file for bankruptcy is likely to be smarter with the help of a bankruptcy lawyer. It is a major life decision, after all, that is going to have an effect on your life for years to come.
Yes, it will likely cost you some money to hire a lawyer (although your local legal aid company can help you here). The oft-quoted phrase of good old Honest Abe sums it up well: “He who represents himself has a fool for a client.”
That said, you will need to go through a means test to determine which chapter you will be eligible for. Although I said earlier that a Chapter 13 does not require a means test, you are required to prove your income in order to determine how much debt you will need to repay.
Filing a Chapter 13 means that you will hand over the management of your accounts to the court and they will determine how much you will pay your creditors over the life of the bankruptcy. The court will effectively impose a very strict budget on you, which will determine how much of your disposable income you can afford to use to pay off your debt and how much of your income you will live on over the next few years.
As for the time it takes, a Chapter 7 bankruptcy is usually completed or discharged in four to six months. A Chapter 13 takes between three and five years to complete.
How Does Bankruptcy Affect Your Credit?
A Chapter 7 stays on your credit report for 10 years; a chapter 13 remains there for seven years. You should also be aware that you cannot file a second Chapter 7 for eight years and it takes two years after discharge to re-file a Chapter 13. So with just one hit in your barrel, I warn you to be very sure that a bankruptcy will solve your problems before you ignite the fuse.
Both chapters will dramatically lower your score at the start, but if you use it as a ‘fresh start’ you should do so by committing to paying your new bills on time, every time, and monitoring the use of any credit. that you still have. access to. If you start out with a credit score of 700 or higher, point losses of up to 200 are not uncommon with bankruptcy. If your score is 680 or less, you are probably considering a 130-150 point loss.
However, the effect of bankruptcy often goes beyond these devastating effects on your credit report and your score. Having bankruptcy on your record can be a red flag to potential homeowners and employers, and could even impact your insurance rates. It doesn’t say anything about the emotional toll it can cause. That’s why you have to be really sure it’s the right thing to do, it just might be, but be sure.
Alternatives to bankruptcy
Tighten your budget
To help you be sure, I suggest you take a close look at what you owe and your current income. A minimal budget is necessary to see if you can find the funds to get yourself out of the hole you have dug. That means limiting your spending on non-essentials – think premium cable channels and restaurants, for starters.
Selling certain items can be a good way to raise additional funds or use online services to offer items for sale. Target all the extra money you earn for your debt. You could consider a second job or a part-time job to supplement your income and use it again for your debts. You can also look at a debt consolidation loan to see if lower interest rates and longer repayment terms will help.
Ask your creditors for relief
Contact your creditors and see if you can find better terms or settle for less than you owe. Don’t be afraid to tell them that you are considering bankruptcy. If you end up depositing they will know it anyway and if there is a way to avoid it, it will be better for both of you.
Contact a credit counselor
If all of these ideas seem overwhelming (and I don’t blame you if they do), there is help available. Contact a credit counselor. You’ll have to do this anyway if you decide to file for bankruptcy, but my suggestion is to make contact before you decide to file for bankruptcy.
Your credit counselor will review all of your options (including bankruptcy) and help you find the best plan for you. You can find a qualified non-profit agency that offers bankruptcy advice through the National Foundation for Credit Counseling.
If overwhelming unsecured debt is what got you to this point, a debt management plan might be the answer. Similar to a Chapter 13, this is a systematic approach to paying off unsecured debt in three to five years. The big differences are less damage to your credit, you live on a budget that you choose, and you’ll have ongoing support from a certified professional whether you need to change payments, seek more help from your creditors, or can’t make it. a payment due to a change in circumstances.
While your score may suffer a bit if you go this route (because your credit cards will be shut down), if you’re about to consider bankruptcy anyway, I suspect your score has suffered a lot already. And because of the fixed one-off payments required to stay on the plan, your score will bounce back sooner than you expect. Certainly sooner than having bankruptcy on your credit report, with all the problems that come with it.
Have a credit question for Steve? Send him a message on the Ask Bankrate Experts page.