If you’ve been struggling to manage mounting debt, you may be considering bankruptcy. However, this can be a very complicated and expensive process that will impact your credit harshly. A bankruptcy filing could lower your credit score by as much as 240 points, and depending on the type, stay on your report for as long as 10 years. Bankruptcy should be your last resort. It’s important to think long and hard before pursuing this solution. Here are a few things to consider before you take the leap.
1. Decide if bankruptcy is right for you
Figure out if you are a good candidate. Bankruptcy may be the right option for you if you are being sued for debts or if your wages have been garnished. Bankruptcy (chapter 13) may also be the best choice if your home is about to go into foreclosure because it may allow you to catch up with late payments. However, also take the long-term consequences into consideration.
“…Assess your future prospects and the consequences of a bankruptcy. Bankruptcy can have an effect on promotions, new job applications, renting a new apartment, insurance, and your ability or cost to make major purchases. What are you goals for the next two to 10 years?” said Bankrate debt advisor Steve Bucci.
2. Seek alternatives
Have you taken steps to reduce your debt? Can you get a second job? Before you file, see if you can adjust your budget first. It could just be a matter of exercising better money management habits. Schedule a meeting with a certified credit counselor to see what all of your options are. Visit the National Foundation for Credit Counseling website for a directory of certified credit counselors.
“There are many alternatives to bankruptcy, including settling your debts for less than what is owed, borrowing from a family member or friend, and debt-management programs to name just a few. They are all worth checking out before committing to bring in the big guns!” said Bucci.
3. Understand the basics
There are two different types of bankruptcy. Chapter 7 bankruptcy is where most (and sometimes all) of your debts are cancelled over a period of three to six months. With chapter 13 bankruptcy, also known as a “wage earner’s plan,” consumers repay part or all of their debts. A chapter 7 bankruptcy filing stays on your credit report for 10 years, and a chapter 13 filing will stay on your report for 7 years.
4. Know the rules
Be aware that you will be required to complete pre-bankruptcy credit counseling with a counselor who has been approved by the court. The U.S. Department of Justice has a list of approved agencies. The objective of working with a credit counselor is to see if you could possibly avoid going through bankruptcy as a means to resolve your debt struggle.
5. Not all debts can be discharged under Chapter 7 bankruptcy
Certain taxes, spousal or child support, and fines owed to government agencies, for example, are nondischargeable. In addition, some debts are not automatically dischargeable, so a creditor could object to your request and win. Some types of debts that fall under this category are luxury items purchased on a credit card that are owed to one creditor, costing more than $650 and charged within three months of filing for bankruptcy, and debts that were incurred as a result of fraud.