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Are you really seriously in debt? Are you in arrears on your payments? Have you dug yourself into such a hole that you just can’t see ever getting out? In this case, you may be thinking about filing for bankruptcy.
The two types of bankruptcies
There are two types of bankruptcies available to individuals. They are Chapter 7 and Chapter 13 bankruptcies. A chapter 7 bankruptcy is often referred to as a liquidation bankruptcy, while a chapter 13 is more of a reorganization bankruptcy.
A chapter 7 bankruptcy
A chapter 7 is called a liquidation bankruptcy because its purpose is to liquidate your possessions so your creditors can be paid off. However, that's in theory. In practice, so many assets are considered "exempt" that in most chapter 7 bankruptcies, nothing is liquidated. For example, you are allowed to keep the equity in your house up to a maximum amount (depending on the state in which you live) and ditto the equity in your automobile. You are also allowed to keep your personal possessions and furnishings and any tools used in your work. This means that for most people, everything they own is "exempt" and not subject to liquidation.
Debts that are discharged
A chapter 7 bankruptcy will discharge most if not all your unsecured debts. It will discharge any credit card debts, personal loans, lines of credit (if unsecured) and medical bills. It will not discharge student loan debts, child support or alimony, or any debts you incurred fraudulently. It will also not discharge past due taxes or any secured debts such as an auto loan.
A chapter 13 bankruptcy
A chapter 13 bankruptcy will not discharge any of your debts. Its purpose is to help you get your debts reorganized and to give you time to pay them off – usually three years. These are years during which your creditors cannot try to collect your previously incurred debts unless they go through bankruptcy court. The upside of a chapter 13 is that you would get to keep all of your assets. A chapter 13 will also stop any foreclosures.
Not everyone is eligible
If you think your best option would be a chapter 13 bankruptcy, you will need to demonstrate to the bankruptcy court that you would have sufficient income to meet your repayment obligations after certain allowed expenses are subtracted along with the payments you are required to make on your unsecured debts.
The impact on your credit score
Whether you file for a Chapter 7 or Chapter 13 bankruptcy your credit score will be negatively affected. I have read that declaring bankruptcy could reduce your credit score by 200 points. This means that if your score had been 740 before you filed for bankruptcy, it would now be 540. In addition, a bankruptcy will stay in your credit report for seven or 10 years, depending on the credit-reporting bureau. In the case of a chapter 13, this would most likely be seven years after you complete your repayment plan.
The good news
The negative effects of filing for bankruptcy will be lessened as time goes by and old accounts are removed from your report. Plus, if you continue to make your payments consistently, you'll create a positive pattern that should help improve your credit rating.
A better alternative
A third option that's chosen by many families is to let us settle their debts for them. While this will also impact your credit score, its effect will not be as severe as if you had filed for bankruptcy. Debt settlement can get your debts reduced substantially and help you become debt free in two to four years. Don't file for bankruptcy until you've contacted us to learn more about debt settlement.