Bankruptcy
–
Its Not a Bad Word
What is bankruptcy?
When you have creditors
calling trying to collect on your debts and you don’t have the means to pay,
bankruptcy is the only viable option for many. By filing bankruptcy you can stop
the creditor harassment, wipe out your debts and start new. It is a ‘do-over’ at
your finances; a second chance to do it right.
Although bankruptcy may
seem like an easier way out then paying your debts outright, there are a lot of
negatives to consider. It will severely hurt your credit rating and you will
have a very difficult time, perhaps impossible, obtaining new credit cars or
loans for cars or houses.
Each person needs to
individually access their own financial profile to see if bankruptcy is worth
the negative credit rating, the stress, and possibly the depression that may
follow for those that view bankruptcy as a failure.
Different types of
bankruptcy
There are two different
types of bankruptcies that individual can file, Chapter 7 & Chapter 13.
Chapter 7 allows you disburse of most or all of
your debts at the time of the court ruling. This method, however, has more of a
negative impact on your credit rating and will stay with you longer—up to ten
years. People who file Chapter 7 are considered to be a much more credit risk
then those who file Chapter 13.
In a Chapter 13 filing you pay off your debts in what is known as
reorganization. Through the courts, a court-appointed trustee will determine
your new standard of living and how much of your income will be given to you to
live on and will divide the rest among your creditors each month. For the next
three to five years, you will have to live on a strict budget while your debts
are getting paid. At the end of the reorganization your debts are considered
paid in full, however, the record of your Chapter 13 bankruptcy will stay on
your record for five to seven years.
In order to pay off your debts within the allotted time period, your debts may
be reduced and your interest eliminated. You will not be able to obtain new
loans or credit without the courts permission while you are on the program, as
this would defeat the purpose of the debt reorganization.
Who should file bankruptcy?
Bankruptcy should only be
used as a last resort by those who absolutely cannot pay their bills, not as an
easy way out of your obligations. Because of the serious negative impact
on your credit rating you should seek the advice of a reputable credit
counseling agency first—they may be able to negotiate with your creditors to
reduce your payments and interest rates.
Some of the main reasons
why people choose to file bankruptcy are due to a severe financial setback such
as a loss of a job or decreased income because of a demotion or forced to take a
new, lower paying job because of layoff.
Many people are also
forced into bankruptcy because of a death of a spouse, divorce or separation,
child support and/or alimony, or because of a serious medical condition that
prevents employment and comes with costly medical bills.
You should consider
bankruptcy as an alternative if you are unable to be out from under your credit
card bills and/or unsecured debt within 4 years with strict discipline and
budgeting—the long-term stress just isn’t worth it. Also, if you are more than
two months behind on your payments, are getting collection calls from your
creditors, collection agencies, or attorneys, or if you have received
foreclosure or repossession notices.
How can bankruptcy help me?
Filing bankruptcy helps to
eliminate your debt (chapter 7) or can structure your debt payments (chapter 13)
so that you can get back on your feet and get a fresh start. If you are
receiving annoying creditor harassment calls these will cease. When you file for
bankruptcy the courts will notify your creditors and they will be ordered to
stop attempts at collections.
Filing bankruptcy may be
better for your overall credit. If it would have taken you several years to pay
off your debts, you are consistently behind on your bills anyway, your credit is
probably already negative. By filing bankruptcy you can get the financial relief
that you need to start building up a savings reserve and in time can apply for
new credit. We just warn you to learn from your mistakes and use credit cards
responsibly in the future.
How can bankruptcy hurt me?
Obviously, bankruptcy is
not easy or everyone would do it. Some of the worst negatives will be your
inability to get new credit. Because a bankruptcy may stay on your credit report
for up to ten years, if you are able to secure a new loan or credit card it will
probably be at an extremely high interest rate. Lenders will see you as a bad
credit risk and, until you can prove otherwise, you will have to pay for the
privilege of getting and using credit.
Bankruptcy may also come
with so not so obvious problems that you may not be aware of:
- It could raise your
insurance rates – some agencies factor in your credit rating when
determining your rates
- It may effect being
hired for a new job or promoted – although it is illegal to discriminate
against someone because of bankruptcy, you may be viewed as an irresponsible
person and be passed for promotion to someone who is equally qualified.
Credit Counseling,
Debt Consolidation, &
Debt
Settlement—We’ve also written articles about these alternative forms of debt
repayment. You may want to look into each of these to see which one is right for
you and your current situation.
