When is it Time to File for Bankruptcy?

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When is it Time to File for Bankruptcy?


The decision to file for bankruptcy is not one to be taken lightly. The financial and credit ramifications are huge, and the real costs can go well beyond the initial filing expenses. At the same time, if you’re struggling with unsecured debt that you have no hope of paying off, bankruptcy can be a viable and potentially worthwhile solution.

Whether you need to file for bankruptcy will depend solely on your personal financial situation; The fact that your friend, family member, or favorite online blogger promotes filing for bankruptcy should have no influence on whether you choose to file. Instead, you need to take a long look at your individual financial situation and ask yourself three important questions.

  1. Is Bankruptcy Really Necessary?

Filing for bankruptcy is not something that should be done simply to pay off a few credit cards, and it isn’t a magic solution to pay off an auto loan or mortgage on which you’ve fallen behind.

Filing for bankruptcy is a serious legal proceeding that has long-term financial ramifications that can take years to overcome. In fact, a bankruptcy discharge can sit on your credit reports for up to 10 years, dropping your credit score by dozens if not hundreds of points. This will severely limit your ability to obtain new credit cards or loans, and what credit you do obtain will typically charge high rates and fees.

Furthermore, a recent bankruptcy can disqualify you entirely from obtaining a home mortgage loan, even if you intend to use a government-insured loan like an FHA or VA loan, making it necessary to wait several years after filing to attempt to obtain a mortgage. Depending on how low your score drops after filing, you may need to wait even longer for your credit to rebound before you can buy a house.

In other words, if you have any other options for getting your debt under control, you should explore them long before you seriously consider filing for bankruptcy.

  1. Will Bankruptcy Actually Help?

The types of debt you can discharge through bankruptcy will depend on the type of bankruptcy you file, and some types of debt can’t be discharged through any form of bankruptcy whatsoever.

Specifically, Chapter 7 bankruptcy — also called liquidation bankruptcy — can only be used to discharge specific unsecured debts like credit card or medical debt. Secured debts or other legally protected debts cannot be discharged through Chapter 7 bankruptcy. The list of non-dischargeable debts includes:

  • Auto loans
  • Home mortgage or property liens
  • Most student loans
  • Back taxes
  • Child support payments
  • Alimony payments
  • Government imposed restitution, fines, or penalties
  • Debt from fraud or embezzlement
  • Debt from willful and malicious acts

Furthermore, while you can’t discharge auto or mortgage loans by filing for Chapter 7 bankruptcy, the bankruptcy process can result in the liquidation of your assets — which can include your car and house. This means you could lose your home or vehicle by filing for Chapter 7 bankruptcy.

If you’d like to retain your assets and/or don’t qualify for Chapter 7 bankruptcy, the next common option is Chapter 13 bankruptcy, also called reorganization bankruptcy. However, filing for Chapter 13 bankruptcy won’t actually result in any of your debts being discharged. Instead, you’ll be given a three- to five-year repayment plan based on your income and debts.

  1. Do You Have a Plan to Rebuild Your Credit After Filing?

The final question to ask yourself before deciding to file for bankruptcy is whether you have a plan in place for what happens after your bankruptcy is complete, particularly if you file Chapter 7 bankruptcy and discharge your current credit lines. That’s because bankruptcy tends to tank your credit score, which means rebuilding your credit will need to be a priority — and it won’t be easy.

Qualifying for new credit with a fresh bankruptcy discharge on your credit reports will be an uphill battle, and you’ll likely need to turn to pricey subprime credit cards or deposit-required secured credit cards. You may also have challenges qualifying for non-credit related needs that involve a credit check. This can include applying for housing, like a new apartment, as well as necessities like utilities and cellphone plans.

Bankruptcy as a Last Resort

If, after asking yourself these three questions, you still believe that bankruptcy is the right option to deal with your debt, then you’ll need to now decide how to tackle it. While you can legally file for bankruptcy on your own, the data indicates that you’ll have significantly more success by hiring a professional to file on your behalf. Bankruptcy is a complicated legal process with wide-spread consequences, and hiring a professional is often well worth the additional financial costs.

 

 

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