Bankruptcy - The last option for debt problems

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The bankruptcy myths and truths

Reasons to file bankruptcy

  • It gives fresh start to your finances
  • You can get discharge from your debts quickly
  • You've no other option left to wipe out debts
  • Only thing you can afford to do is bankruptcy
  • You may get debt relief at least cost

Steps to take before filing bankruptcy

  • Gather knowledge about bankruptcy rules
  • Go through the available resources
  • Talk to an experienced bankruptcy attorney
  • Fill out the form and submit it

If you have tried almost every option to wipe out your debts but haven't succeeded in your attempts, then you can consider filing bankruptcy. It can be regarded as your last debt relief option to give a fresh start to your financial situation.

Bankruptcy - How it works

By bankruptcy definition, it is a court process that can be initiated either by an individual or a creditor. It works well for most of the individuals since they can discharge debts partially or completely.

Types of bankruptcy

There are 2 types of bankruptcy:

Other types of bankruptcy are:

  • Chapter 9
  • Chapter 11
  • Chapter 12
  • Chapter 15

How much
debt settlement
can save you

How you can decide to declare a bankruptcy

It is true that you should try to avoid bankruptcy. You can try out some other debt relief options beforehand to get rid of your debts. However, you should seek help of court when your debts are completely unmanageable. You can decide to file bankruptcy when:

  • You've failed to reach an agreement with creditors
  • You couldn't manage finances even after consulting with a credit counselor
  • You're facing lawsuits, which you want to stop
  • You want to stop annoying collection calls
  • Your debt obligations are far more than your assets
  • You've received foreclosure notice, and you don't want to lose your home
  • Your wage has been garnished, and you want to stop that
  • You want to stop the lender to repossess your vehicle

What you should do before filing a Chapter 7 or 13

You can try out these things before you decide to file bankruptcy.

  • Analyze your financial situation and plan a suitable budget
  • Try out the debt relief programs to get out of debt
  • Prioritize your debts and make an alternative payment plan with creditors
  • Go for a pre-bankruptcy counseling
  • Consult an attorney to get the best bankruptcy advice

Bankruptcy Forums - Valuable source of information

  • Click on forums to know about ongoing discussions
  • Know about other people considering it
  • You can talk to a professional or click the resources tab

Bankruptcy - Effect on credit report and score

If you file a Chapter 7 bankruptcy, then it'll show on your credit report for 10 years, and a Chapter 13 bankruptcy will appear for 7 years.

It depends on your present credit situation how much your credit score will drop after filing bankruptcy. Usually, people opt for this debt relief strategy when their credit is already in poor condition. So, there might be less impact on credit score due to bankruptcy. However, it can drop one's credit score by almost 200 points. So, you can try to avoid bankruptcy if you can.

Bankruptcy can help you get a discharge from most of your unsecured debts, like credit cards. After you get rid of your unsecured debts, your credit utilization will become zero. This will help increase your credit score.

Misconceptions about bankruptcy

Misconception: After a bankruptcy, you cannot get new credit for about 7-10 years of time, as long as it continues to appear in your credit report.
Truth: A bankruptcy doesn't cut you off from getting new credit for 7-10 years. You can get fresh credit offers within a year after you get a discharge from your previous debts. However, you might have to pay a relatively higher interest rate on your credit card, or you may have to apply for a secured card. It will be better for you to take out a secured credit card. You can obtain a credit card or a mortgage loan to buy a home if you can show that you've started managing your credit in a better way, after a bankruptcy discharge.
Misconception: There is a stigma attached to filing bankruptcy. You'll be looked down upon if you file bankruptcy.
Truth: Nowadays, filing bankruptcy has become quite common. After you file bankruptcy, you won't walk around with a tag that you've filed bankruptcy. Only your attorney and your creditors will come to know that you've filed bankruptcy.
Misconception: You can be fired from your job if you file bankruptcy.
Truth: It is absolutely unethical for an organization to fire someone if he/she has filed bankruptcy. After filing bankruptcy, a person's job is protected by federal legislation. It is true that a potential employer will have a look at your credit file, but cannot discriminate against a person for his/her financial records of the bankruptcy filing.
Misconception: Bankruptcy will discharge you from all your debts.
Truth: Bankruptcy can help you get a discharge from nearly all of your debts except student loans, federal and specific state taxes and debts you've acquired in the case of fraud. However, it is better to consult a professional as there are ways to get a discharge from student loans.

Therefore, it is advisable that before filing bankruptcy, consult an attorney for proper bankruptcy information. It also involves a lot of paperwork and legal formalities. So, an experienced lawyer can help you complete the legal process successfully.

Filing Bankruptcy - You can finance a loan after about 12 months of getting discharge of debts

Chapter 7 Bankruptcy will stay on your credit report for 10 years.
This does not mean you won't have access to credit for the full 10 years!
This is one of the biggest misconceptions out there, and partially what motivated me to write this.
There are many reasons to try to avoid bankruptcy.
Your ability to get credit in the future is one of the flimsiest. Up until the economy started crashing in 2007, consumers who discharged debt in a chapter 7 were finding unsolicited credit offers in their mailbox within 6-12 months of discharge.
The credit offers were generally subprime, so not the best limits and rates, but were offered nonetheless. With the return of risk aversion, and many of the subprime credit card issuers having left the market, I did not see these solicitations for credit just outside of bankruptcy being offered much. Read more...
At the time I first published an article on this topic, I suggested it would be less likely to see credit card offers directly after chapter 7 bankruptcy moving forward, as banks would be repairing their balance sheets for years to come. I am now seeing evidence that banks are stepping back in to attracting post bankruptcy consumers by offering lower limit higher interest credit cards.
Having just obtained discharge of unsecured debt, one should not be in a hurry to obtain more, and most certainly not at subprime rates. Current FHA underwriting standards mean you will not qualify for FHA funding after filing bankruptcy for a period of 2 years. It is, therefore, unlikely you will get a loan for a home purchase in this time frame, given the current loan market.
Student loans are generally off the table for a few years, including ones you would apply for in order to assist your child.
You may be able to finance a vehicle purchase after a chapter 7 within 12 months after discharge.
Your credit score is factored on several data points. Roughly a third of it is factored on credit utilization/debt to income (DTI). After discharging debt in a chapter 7, your DTI and utilization should be fabulous.
Now, you wait out some of the 2-3 year timelines lenders and underwriters use as a standard, take a few effective steps to rebuild credit, and this whole 10 year misconception is seen for the baloney it is.
Chapter 13 Bankruptcy is totally different. It's the worst of all options. The court is overseeing a repayment plan of 3 or 5 years. It's on your credit report, you're on a court approved household budget, and if you were to seek a new credit contract of virtually any type, you must first get approval from the court appointed trustee, who has been empowered to tell you ‘NO’. This version of bankruptcy is credit purgatory. It is rigid and inflexible. You will have court protection from creditors, but at the highest cost. It is an option, but should be seen as a last resort if the purpose for filing is strictly based on overwhelming credit card debt.
Michael Bovee
Industry Expert
Michael Bovee

Last Updated on: Wed, 28 Oct 2020