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If you choose a chapter 7 bankruptcy, which is by far the most popular type according to the report from the American Bankruptcy Institute, it will wipe away all or most of your debts but it will have a very negative impact on your credit score. Of course, if your finances are in such bad shape that you’re filing, your credit has already been impacted.
A bankruptcy will stay on your credit reports for 7 to 10 years, depending on which type you choose. If you choose a chapter 13 it will remain on your credit reports for seven years while a chapter 7 will stay there for 10 years.
Once you have this in your credit files you'll find it very difficult to get new credit for two to three years. Having a bankruptcy could cause your insurance premiums to increase and you might have a tough time renting a house or apartment.
What it can and can’t do
A chapter 7 bankruptcy will eliminate your personal liability for a mortgage loan. But it does not get rid of the right your lender has to foreclose on its lien. This means that if you want to stay in your house, you’ll need to keep making your mortgage payments.
When you file a Chapter 7 and have a car loan, you must decide whether you want to keep the car or give it back to your lender. If you want to keep it, you’ll have to pay for it, and the most popular way to do this is by reaffirming the car loan.
Bankruptcy will get many of your debts discharged but possibly not all of them. For example, it will not discharge child support, alimony, some debts you incurred in the six months prior to filing, some student loan debts, some taxes, and loans obtained fraudulently.
If you decide to file for bankruptcy
If you choose to file for chapter 7 bankruptcy, you may be required to get credit counseling within 180 days before you file. You will also be required to get this counseling from one of the approved providers listed in the United States Courts’ website, Justice.gov. Most of this counseling is available online or by telephone. Once you have received the required counseling you might have to hire an attorney to help you through the process. In the event you can't afford to hire one there may be options for free legal services. The American Bar Association has resources and information available that could help you find free legal services or a lawyer.
Do understand before you file for bankruptcy that the process must be completed in a federal court and not a state court and can cost several hundred dollars just in fees alone.
There are other options available to you. For example, there's consumer credit counseling, which could help you become debt-free in about five years and would not have a negative impact on your credit score.
If you own your own home and have equity in it, you might be able to get a home equity loan or homeowner equity line of credit. You could then use the proceeds from this loan to pay off your debts.
If the biggest majority of your debts are from credit cards you might be able to do a balance transfer to a card with a lower interest rate or a 0% interest balance transfer card.
Finally, many Americans have chosen debt relief services. Debt relief uses experienced negotiators to work with creditors and lower your total balance. You could end up paying just a fraction of what was originally owed and in only 24-48 months. With National Debt Relief, specifically, there are no fees until your debts are actually reduced, so there are no surprises. Thousands of people have used these services to get out of debt. You can too.