Most consumers understand that bankruptcy will have a negative effect on one's credit score, but most do not understand the depth of that impact or the other consequences associated with doing so. Filing Chapter 7 Bankruptcy , which is the most popular option for people who do in fact declare, can stay on your credit report for 10 years. Even worse, it is a matter of legal records for up to 20 years. With more and more employers increasingly doing credit and background checks when reviewing job applications, the effects of bankruptcy can be felt for far too many years down the road. Generally, a bankruptcy filing on your credit report is considered the worst mark possible to have, and it will likely affect your ability to get loans for many years in the future.
Reasons To File Personal Bankruptcy
Although the credit rating effects of filing can be severe, there are many cases when it is still the most suitable option for the debtor. Some of the most situations when filing bankruptcy makes sense include the following:
- A credit card company is pursuing a lawsuit against you - In most states, assuming the creditor wins, they will obtain a judgment, and either garnish your wages, put a lien on your home or vehicle, or levy your bank account to collect the outstanding credit card debt. In this case, having your debt resolved completely through bankruptcy is actually preferable to most lenders than having as much as 25% of your income subject to wage garnishment, for example. (Note: some states like Texas, Florida, California, Arkansas, Oklahoma, Pennsylvania, Massachusetts, South Dakota, New York, and Illinois have generous bankruptcy protections against one ore more of these options. Please consult a debt lawyer or attorney to discuss your situation.)
- You have no income or assets - In this situation, satisfying your debt is a likely scenario. So why deal with the creditor harassing phone calls in the meantime?
The New Laws & Requirements For Filing Bankruptcy
With the new bankruptcy law changes in 2005 , not only have the consequences of filing become much more severe, but it is also much more difficult to even be eligible. In light of this, in order for a debt to be eligible for bankruptcy, it must meet the following requirements:
- Any credit card debt that is comprised of more than $550 for luxury purchases that were made within 90 days of filing is not eligible.
- Along the same lines, any cash advance made 70 days prior to filing that is greater than $825 is not eligible.
- Debts owed to retirement funds are not eligible for Chapter 7 Bankruptcy.
- Student loans are generally non-dischargeable in both Chapter 7 and Chapter 13 Bankruptcy.
- Government fines and penalties do not qualify for Chapter 7 Bankruptcy.
- Taxes owed for years in which you did not file a return are no longer eligible for Chapter 13 Bankruptcy.
Alternatives to Declaring Bankruptcy
Two of the best alternatives to filing bankruptcy are debt settlement, also known as credit card debt negotiation or credit card debt reduction , and credit counseling. Debt settlement involves negotiating with creditors (normally for medical bills, credit cards, collection accounts, or personal loans) to reduce your debt, sometimes by as much as 40-60 percent of the balance. In its very essence, debt negotiation is a great option for anyone who is seriously considering declaring bankrupt.
The other option is consumer credit counseling. Credit counseling involves working with credit card companies to lower your interest rates and waive any late fees or over the limit charges. Unfortunately, for anyone who is considering bankruptcy, it is unlikely that debt counseling will be of much help since the payments can oftentimes be too expensive. That being said, if you are only flirting with the idea of bankruptcy, it is possible that credit card counseling can help you pay off your debt faster than you would be able to otherwise.
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Questions About Chapter 7 & 13 Bankruptcy
1.What is the procedure or process?
The first step is you must have a 90 minute session with a court-approved credit counselor to see if another type of debt resolution is possible in your situation. Assuming the credit counselor gives you the certificate necessary to move forward, most people will have a consultation with an attorney to determine which Chapter Bankruptcy is more appropriate given your circumstances. (It may not be necessary to consult a lawyer if your case is routine). You then fill out a packet of forms and file them with your local bankruptcy courthouse. The entire process normally takes as little as 3 to 6 months to complete for Chapter 7 and three to five years for Chapter 13.
2. I filed bankruptcy before. Can you do it twice?
As long as you filed Chapter 7 more than 8 years ago and Chapter 13 more than 6, you can still qualify for bankruptcy help .
3. Can you file on your own?
Yes, you can do it yourself, but if your case is complicated and you have a lot of assets, you may want to consult an attorney.
4. Can I be forced into bankruptcy?
Although rare, involuntary bankruptcies do exist.
5. How will this affect my wife (or husband)?
How your spouse is affected by your filing depends on what state you live in. For example, in community property states like Alaska (if the spouses agree to treat their property as such), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, any debt incurred during your marriage is treated as a debt for both the husband and the wife. So if one files bankruptcy, any debts incurred during the marriage are discharged. Debt incurred before the marriage are not, however. Unless you file jointly in most states your spouse will not be affected.
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