If you're dealing with debt that you cannot pay off, you've probably wondered about bankruptcy. Many people think of bankruptcy as a bad credit option or even a moral failing. The truth is, many people find that bankruptcy profoundly improves their financial situations and their lives overall.
There are real benefits to bankruptcy:
As soon as you file, creditors are legally required to stop trying to collect your debts. Any further communication must be through your lawyer, so you should receive no more harassing phone calls. Moreover, it stops foreclosures and evictions in their tracks. It keeps your utilities from being turned off. It puts a halt to wage garnishment. These benefits only last through the bankruptcy process, but they can make your life easier immediately while putting you in a better position to pay off any remaining debt.
Chapter 7 bankruptcy can discharge many of your debts, while Chapter 13 can help you pay them off in a reasonable period at a payment plan you can afford. You won't lose your personal property and you may be able to keep your home and car if you can afford the payments after reducing your overall debt.
Bankruptcy won't discharge child support or alimony, many tax debts, co-signed debts or, in most cases, student loans. However, you will generally be in a better position to pay those debts once the others have been wiped out.
If you are eligible for Chapter 7 bankruptcy, many of your debts can be wiped away. This typically includes credit card debt, medical bills and many other types of loans.
Under Chapter 13 bankruptcy, the court helps you set up a three- to five-year repayment plan that you can afford. If you successfully complete the plan, any remaining debt is generally discharged. If the payment plan puts you in a position to make current and past-due mortgage payments, Chapter 13 can often save your home from foreclosure. Chapter 13 can also eliminate second and third mortgages in many cases.
Bankruptcy can actually improve your credit over time. It's true that bankruptcy has a negative effect on your credit, but juggling debt for years will not maintain a good credit score. The effect of a bankruptcy only lasts 10 years at most, and many lenders will be willing to work with you much sooner than that.
What to keep in mind before you file bankruptcy
It's best to get a clear idea up-front about what debts you have and how they will be treated in bankruptcy. An attorney can also determine whether you qualify for Chapter 7 and help you understand the requirements of bankruptcy.