Bankruptcy: What You Need to Know
If you’re facing bankruptcy, you’re not alone. Hundreds of thousands of Americans have declared bankruptcy at some point in their lives. And with the financial realities many people face today-rising credit card debt, astronomical student loans, and the subprime mortgage crisis-America’s bankruptcies will likely continue to rise.
If you’re over your head in debt, bankruptcy may actually be the most reasonable choice. But declaring bankruptcy has lasting consequences. It’s not an easy way out-it’s an option of last resort. Before you declare bankruptcy, here are some of the facts you need to know.
Chapter 7 vs. Chapter 13: Types of bankruptcies.
When most people think of bankruptcy, they think of Chapter 7. During a Chapter 7 bankruptcy, your material assets are sold to pay your creditors. Once you do that, your remaining debts are cancelled.
It sounds simple, but there are a few complications. You can sometimes save some of your possessions if you can prove you need them for your line of work. If you have any liens, you can’t erase those through a Chapter 7 bankruptcy-so that lien on your mortgage stays, even if the rest of your debts are pardoned. However, Chapter 7 does cancel the bulk of a person’s debt, so it’s usually considered preferable.
Under Chapter 13 bankruptcy, the court works with you to develop a three- to five-year plan to pay off your debt. Once you pass that period, your debts are forgiven. With this type of bankruptcy, you usually don’t lose your home or other possessions. However, Chapter 13 is still more expensive than Chapter 7.
The amount you agree to pay must be more than the amount of money your creditors would get if you liquidated your assets, and you must prove your payment plan is feasible for you. You also must show the court that all of your discretionary income is going toward your debt. You pay more under Chapter 13, which is why most people prefer Chapter 7. But in order to file a Chapter 7, you may be asked to prove that you can’t afford Chapter 13.
Why You Should Go Bankrupt.
There are some advantages to going bankrupt. These can vary, depending on the type of bankruptcy you’re filing under. Here’s an overview.
Most or all of your debt is forgiven. Whether you file Chapter 7 or Chapter 13, you eventually get a fresh start. Bankruptcy allows you to start rebuilding your finances without the burden of unmanageable debt. This can give people freedom they never could have found otherwise. It also ensures protection from debt collectors. During the bankruptcy process, your attorney will negotiate with them for you.
You can protect some of your assets. Many states allow you to keep your home and car when you file for bankruptcy, although this won’t always be the case. Since Chapter 13 was introduced, the laws regarding what you can keep have become more strict, however.
It can improve your chances to get loans. Once you file for bankruptcy, you are prohibited from filing again for six years. If you go looking for a loan after you file for bankruptcy, creditors will know that you can’t file for bankruptcy again any time soon. This may actually be an advantage when applying for some loans.
Why You Should Think Twice.
Despite the benefits, there are serious, lasting consequences to declaring bankruptcy. The decision to declare bankruptcy will have an effect on your finances for a very long time. Here’s an overview of what to expect.
Your loans will be expensive. It won’t be impossible for you to open a credit card or get a loan after declaring bankruptcy. But your interest rate will be astronomical. This may keep you away from credit altogether. This may be a blessing; you may never want to open another credit card again. But if you need a loan, you’ll have trouble. And forget about buying a house: people who’ve declared bankruptcy within the past five years are almost never able to get mortgages.
Your credit record is damaged. Bankruptcy stays on your credit report for ten years. That’s a decade of difficulty in securing credit and a decade of astronomical interest.
You won’t lose your debt completely. Some debt never goes away unless you repay it-bankruptcy or not. Back taxes, liens, and student loans won’t be dissolved under bankruptcy, either Chapter 7 or Chapter 13.
The decision to declare bankruptcy should never be made as anything but a last resort. For some people, however, it’s the best choice-or the only choice. Bankruptcy may be awful, but you’ll survive-especially if you’re young and don’t have many assets to begin with. Before you declare bankruptcy, learn as much as you can-and get a good lawyer.