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The Mysteries of Bankruptcy

Filing for bankruptcy can be a stressful, confusing time. Declaring bankruptcy makes it difficult to obtain credit and ends up costing the consumer money in the long run through higher interest rates on the credit they do obtain. There are different types of bankruptcies, known as chapters, but the most well known are Chapter 7 bankruptcy and Chapter 13 bankruptcy.

Most recently, new bankruptcy laws make the requirements to file a bit stricter and an increased emphasis on exploring alternative options to filing bankruptcy are being encouraged. So before a consumer decides to throw up their hands and insist that bankruptcy is their only option, they can consider these less credit-devastating options:

Taking on a debt consolidation loan
Negotiating a debt settlement with creditors
Applying for a home equity line of credit

Although filing for bankruptcy does not mean the permanent end to credit for the rest of the consumer's lifetime, it does leave a black mark on the credit report for 7 to 10 years. Consumers should make sure to explore all their options, and speak with a financial advisor, before deciding whether or not bankruptcy is the right decision.

If bankruptcy is the only option, a consumer should know the difference between filing Chapter 7 bankruptcy and filing Chapter 13 bankruptcy.

Chapter 7	Chapter 13
Dismisses all debts listed under Chapter 7	Chapter 13 outlines a 3-5 year plan for paying back debt
Stays on the credit report for 10 years	Stays on the credit report for 7 years
Non-exempt property is auctioned or sold to pay back creditors	Consumer gets to keep their assets because they pay back creditors on their own. Best option for keeping possessions like a home and car
Tax debts cannot be discharged and sets limitations on them	Tax debts cannot be discharged, but can pay them over time
Creditors are legally prohibited from calling or making any attempt to collect the debt	Creditors are prohibited from taking any collection efforts against the consumer
On assets where there is collateral or lien holders involved, such as secured debts, do not get discharged	Creditors will require the consumer to show that they cannot afford to pay even half of the debt before creditors will agree on the 3-5 year repayment plan

Remember that bankruptcy is a last-resort option that should only be chosen when all other financial options have been explored. The lasting effect bankruptcy can have on credit takes work to overcome and should not be taken lightly.

The information contained in this article is for educational use only and is not intended as financial advice. Please consult with an attorney or financial advisor for your own situation.