Has your financial situation reached a point where you are considering bankruptcy as a way out of debt? Do you know how it can affect you now and in the future? Filing for bankruptcy when you're knee deep in debt can be the correct step to take, but are you aware of other well established methods to successfully avoid bankruptcy? It may be possible to keep a bankruptcy off of your credit report for the next 7 to 10 years. It is also possible to keep home equity and other personal property when you use other strategies outside of the bankruptcy process. Check out the following topics to find what bankruptcy is all about, why, and how you should avoid bankruptcy.
What is bankruptcy?
Bankruptcy is a federal court process where you get the chance to eliminate or reorganize your debts through discharge (which can mean the sale of assets), or by following a repayment plan that will often last 5 years. Consumers typically file either Chapter 7 or Chapter 13 personal bankruptcy depending upon your financial situation.
6 Reasons to avoid bankruptcy
Watch out for the 6 reasons to avoid filing bankruptcy.
- Your credit is badly hit: Chapter 7 and Chapter 13 bankruptcy have a negative effect on your credit. It can bring down your credit score by around 200-250 points. Moreover, the negative entry stays on your credit report for 7-10 years depending on the type of bankruptcy you file, thereby making it difficult for you to qualify for new loans and credit for the next 1 to 5 years. A bankruptcy may only remain on your credit report for 7 to 10 years, but you will find the question "Have you ever filed for bankruptcy" and "If so, when" on many types of financial forms throughout your adult life.
- Property may be affected: There are certain assets that can be protected and other assets that you may not be allowed to keep under a Chapter 7 bankruptcy plan. Depending on your situation and your state's laws you could end up losing items that may otherwise have been avoided.
- Not all debts can be eliminated: It's a myth that bankruptcy can get rid of all of your debts. Back taxes, student loans, child support, alimony/spousal support, student loans (other than the most extreme circumstances) and a few other debts cannot be gotten rid of through bankruptcy. Therefore if you are looking to get rid of these kinds of debts, you should avoid bankruptcy. You can look to budget around debts that cannot be discharged and negotiate other bills in a debt settlement or an alternative payment plan with your creditors.
- Adverse effect on your financial future: Bankruptcy has an adverse effect on your financial situation. For instance, filing bankruptcy can influence the status of your security clearance if you don't inform your employer about your bankruptcy and why you've filed for bankruptcy, and can also limit future job opportunities depending on the field of work you are in.
- You may not qualify for new credit: Getting approval for new loans/credit is tough after you've filed bankruptcy. It'll take anywhere from 2 to 5 years for you to qualify for a secured loan (such as mortgage). Unsecured loans are hard to qualify for if you file chapter 13 bankruptcy for the entire 3 to 5 year repayment plan.
- Not all retirement plans are protected: While many retirement accounts are protected from creditors in a bankruptcy, not all are.
5 Ways to avoid bankruptcy
Check out the 5 alternatives that'll help you to avoid filing bankruptcy.
- Debt settlement: This is a legitimate option, especially when you cannot keep up with the minimum payments on your debts. A debt settlement (or debt reduction) program is where your creditors cut down your debt amount by 40-60% of what you owe.
What you need to do is, negotiate with creditors or collection agencies in order to reduce your debt amount. You can get help from professional settlement services. Check out how to get help settling your debts. You can also settle debts on your own. Check out how to how to settle your debts yourself and avoid bankruptcy as a way to get out of debt.
- Debt consolidation program: If you wish to avoid bankruptcy and make monthly bill payments at reduced interest rates, then debt consolidation (or bill consolidation) program may be your right choice.
A debt consolidation program is where you consolidate your bills into one easy monthly payment by taking out a lower interest loan to pay off your debts. It makes sense to choose debt consolidation in order to avoid bankruptcy when you still have good credit and a dependable income.
- Debt management: This is where a credit counseling agency or a debt management firm helps you reduce your interest rates and penalties. You then make your monthly payments to the credit counseling company and comfortably manage your bills to get debt free in a predictable and faster time frame.
- Payday loan consolidation: If you're struggling with payday loans and wish to avoid bankruptcy, then payday loan consolidation is what you may choose. This is where you consolidate and replace multiple payday loans into an affordable monthly payment.
- Do it yourself plan: The Do it yourself (DIY) plan is where you try getting out of debt on your own without going for professional debt help services. To make your DIY plan effective, you will need to negotiate with your creditors and come up with a monthly payment you can afford to pay. You'll have to plan a budget to manage your daily expenses in addition to paying off your debts. This option provides you flexibilities missing from a chapter 13 bankruptcy repayment plan.
If you're having trouble paying your bills, the best thing is to develop a plan of action ASAP. A good plan may help you avoid bankruptcy and even protect your credit in times of financial crisis. What's important is to analyze your financial situation and find an appropriate solution to your debt problems. Compare the consumer debt solutions in order to choose the best out of them.