If you owe more than you can repay, you may have the option of declaring bankruptcy. Bankruptcy is a legal process that involves seeking the help of the U.S. Federal Court to release or “discharge” some of your debts and get a fresh start financially. In recent years, bankruptcy filings have reached an all-time high.
Bankruptcy is a serious matter that can have significant, long-lasting consequences. While it may be an option, it’s not an easy way out. Bankruptcy law is complicated and changing. You should definitely get professional counseling about your options.
What bankruptcy does (and what it doesn’t)
Depending on your personal financial situation and the federal and state laws that apply, declaring bankruptcy may eliminate some of your debts or allow you to repay just a portion of each debt you owe. The court may allow you to keep some of your assets in the process. Bankruptcy usually does not erase child support, alimony, fines, some taxes, and most student loan obligations. If you file, you will have legal and court costs.
Some bankruptcy basics
- In a typical bankruptcy scenario, a debtor claims the inability to repay his or her debts.
- A bankruptcy judge decides whether or not a debtor may declare bankruptcy.
- If the debtor has defaulted on a loan secured by collateral (such as a car or house), the creditor may still be able to take possession of the collateral even if the debt was discharged.
- Two of the most common types of bankruptcy are Chapter 13 and Chapter 7.
- A bankruptcy will stay on your credit history for up to 10 years.
- It may lower your credit score, causing lenders to charge you higher interest rates in the future.
Before considering the option of bankruptcy
Talk to your creditors to see if they’ll agree to extend your payment schedule, allow you to skip a payment, or some other reasonable repayment alternative. Discuss any possible solutions, and consult with a qualified credit or debt counselor.