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.
types of bankruptcy
There are several types of bankruptcy. Each is known by the chapter of the bankruptcy law that describes it. Two of the most common types are Chapter 13 and Chapter 7.
- In Chapter 13 bankruptcy, the borrower submits a repayment plan to the court and promises to make partial payments to creditors over a period of three to five years. If you have a regular income and limited debt, Chapter 13 allows you to keep your property that you otherwise might lose, provided you continue to make your payments under the repayment plan.
- In Chapter 7 bankruptcy, the debtor surrenders his or her assets to an individual called a “trustee.” The trustee sells the debtor’s assets and gives the money to the creditors. The debtor may be allowed to keep some assets, such as a car, work-related tools, and basic household furnishings. Under the new bankruptcy law you can receive a discharge of your debts under Chapter 7 only once every eight years.
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.