Ask people who are deeply in debt what they would like most and the answer will probably be that they want to get rid of their debts. It might have been fun charging up all those clothes, electronic gadgets and expensive dinners, but it certainly isn’t fun when those credit card statements start pouring in and you find you’re seriously over your head in debt.
Filing for bankruptcy
Filing for bankruptcy could get you out from under all those credit card debts but is it really a good way to achieve debt relief? The most popular type of personal bankruptcy is a chapter 7 or liquidation bankruptcy. The other alternative is a chapter 13. The major difference between the two is that a chapter 7 will liquidate or dismiss most of your unsecured debts to give you a fresh start. In comparison, a chapter 13 is designed to give you a time out during which you would get reorganized and pay off your creditors.
What debts will a chapter 7 dismiss?
A chapter 7 bankruptcy will eliminate most of your unsecured debts. These debts are called unsecured because there is no collateral or asset involved. This includes credit card debts, personal loans, lines of credit and medical bills.
What a chapter 7 can’t dismiss
You cannot use a chapter 7 to get ride of some unsecured debts such as student loan debt. It will also not dismiss any back taxes owed to the U.S. government or your state, nor will it get rid of alimony or child support. And it cannot dismiss secured debts like a mortgage or auto loan.
What you can and cannot keep
If you have a chapter 7 bankruptcy, you will be allowed to keep the equity in your home up to a certain amount (depending on the state where you live), the equity in your automobile (again up to a certain amount), your clothes and furniture and any tools required in your work. You may be also allowed to keep some other personal possessions but this will be at the discretion of your bankruptcy judge or referee. Beyond this, you could lose other possessions that would be sold off to help pay your creditors.
The other downsides of a chapter 7 bankruptcy
There are other downsides to a chapter 7 bankruptcy in addition to the possibility of losing some prized possessions. For one thing, you will be required to take a credit counseling class. Second, a bankruptcy is a public record that stays with you forever. You could lose out on a great job 10 years from now because your potential employer found you had had a bankruptcy.
A blot that lasts 10 years
When you have a bankruptcy, it will stay in your credit report for 10 years and will have a damaging effect on your ability to get new credit. It will probably be three or four years before you could buy a house or get an auto loan. I have read that filing for bankruptcy will lower your credit score by 200 points. This means if you had a score of 650, it would drop to 450. When you do get credit again, you’ll pay a much higher interest rate due to that lower score. Your auto insurance will probably cost more – again because of your credit score.
A better option
If you have prized possessions you don’t want to lose or if you’d rather not have the stain of a bankruptcy in your credit report for l0 years, there is a better way to achieve debt relief. It’s called debt settlement and it’s where you negotiate with your creditors to pay off your debts in lump sums but for less than what you actually owe. While it, too, will have a negative effect on your credit score it won’t be as severe as the 200 points you’d lose if you had a bankruptcy. Contact us today to learn more about debt settlement and why it could be a better way to achieve debt relief.