There’s no doubt about it: the word “bankruptcy” has a stigma attached to it – and not always for good reason. The 3 main reasons people file bankruptcy is medical debt from a catastrophic illness, an unexpected job loss, and divorce. Declaring bankruptcy allows people in these (and other) situations to start over financially. However, there are things you should know before declaring bankruptcy… things that might make the process easier down the line.
5 Bankruptcy Facts You Need to Know
There are different types of bankruptcy.
The two types of bankruptcy typically used by consumers are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is often called “liquidation” bankruptcy as it discharges most unsecured debt including personal loans and credit cards. When filing Chapter 7 bankruptcy, you can keep most of your assets and the process takes about 3-4 months.
Chapter 13 bankruptcy is more a “reorganization” option in which you set up a repayment plan to pay back creditors over a specific period of time. Property liquidation is not required with Chapter 13, however, you’ll need regular income in order to make your payments and it could take 3-5 years for the final settlement of this type of filing.
Bankruptcy affects your credit.
Since payment history is 35% of your FICO® Score, it shouldn’t be a surprise that declaring bankruptcy will hurt your credit. This negative mark remains on your credit reports for ten years and can make it very difficult for you to get credit acceptance for things like a mortgage, auto loan or credit card.
In addition, you know that question on many official forms (i.e. employment applications) asking if you’ve ever declared bankruptcy? Well, if you have declared bankruptcy, you’ll have to check the “YES” box next to this question on these forms for the rest of your life. That’s why it’s so important that before you declare bankruptcy, you know how it can affect all different aspects of your future.
Declaring Bankruptcy doesn’t forgive all debts.
When you declare bankruptcy (even Chapter 7), not all debts are “discharged”. For instance, back taxes, child support, alimony, some student loans and real estate liens will remain in your credit file as debts.
For those debts that aren’t forgiven, there are a few options. Some of these include:
Debt Consolidation which, for instance, is combining all your credit card debt into a single loan so you’ll only have one payment a month. This makes it easier to keep track of your debt.
Loan Refinancing that allows you to renegotiate the terms of your loan (i.e. lower interest rate or monthly payment) so that it will be easier to pay it down while keeping your payment history intact.
4. Bankruptcy costs money.
A major cost when filing for Chapter 7 bankruptcy is the hiring of an attorney. Some attorneys charge a flat fee while others charge a fee based on the amount you owe. In either case, this could result in costs ranging from several hundred to a few thousand in fees that must be paid upfront. Filing fees can also run a couple of a hundred dollars unless you apply for and are granted a bankruptcy fee waiver. Chapter 13 bankruptcy typically costs more because unlike Chapter 7 bankruptcy which settles within a few months, Chapter 13 bankruptcy can take a few years.
5. The positive side to declaring bankruptcy.
From both an emotional and financial perspective, going bankrupt can be a negative experience. However, there is one positive that can come of declaring bankruptcy: as you “start over” financially, you can review how you’ve handled your past spending, credit and other financial activities and recognize where and when things started to go wrong. If you’re honest with yourself and discover these mistakes, there should be no reason for bankruptcy to rear its ugly head again.