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Personal Bankruptcy Information: What You Must Know Before Filing

If you have a lot of outstanding debt and working with a credit counselor isn’t providing you the help you need, bankruptcy could be your only option.

What Exactly Is Personal Bankruptcy?

Bankruptcy is the process that involves you legally declaring yourself unable to pay outstanding debts. Those who declare themselves bankrupt follow a federal court process wherein they get the chance to eliminate or reorganize their debts through sale of assets or by following a repayment plan.

You can file either Chapter 7 or Chapter 13 personal bankruptcy depending upon your financial situation. Read more about the types of bankruptcy.

Bankruptcy Law: How Do You Legally Become Bankrupt?

First of all, you can’t go into bankruptcy until you legally declare that you are unable to pay your creditors. Consumers generally file for bankruptcy if their income is severely overshadowed by their debts and working with a credit counselor on a debt repayment plan isn’t going to cut it.

Bankruptcy laws lay out guidelines for the debtor to repay their debts by dividing up their assets which would then be transferred to the creditors accordingly. Bankruptcy law provides oversight over the entire process and offers some degree of equality in how the creditors are paid out.

Bankruptcy law also allows some debtors to discharge debt that is still remaining after all their assets have been liquidated and distributed to creditors.

Why You Should Avoid Personal Bankruptcy

  • Your credit is badly affected. Bankruptcy filing has a negative effect on your credit because it brings down your credit score roughly 200-250 points. The negative entry stays on your credit report for seven to ten years.

  • You may lose your property. There are certain assets that can’t be protected under bankruptcy laws because the assets are sold off to pay back your dues. Unless you qualify for federal or state exemptions, you may even lose your home or car.

  • Not all debts can be erased. You can’t purge all debt because you cannot wipe out back taxes, student loans and other unpaid dues by filing for bankruptcy.

  • Creditors may repossess your property. Even if you\'ve filed bankruptcy, there\'s a chance that your creditors may repossess or foreclose property on which they hold a lien.

  • You may not qualify for new credit. Getting an approval for new loans is tough after you\'ve filed bankruptcy. It\'ll take at least two to four years to qualify for a secured loan, such as a mortgage or car loan.

  • Future employers could look down on you. A lot of potential employers don’t want to hire anyone who’s filed for bankruptcy.

The Silver Lining of Bankruptcy

  • You are relieved of the stress and pressure of dealing with your creditors.

  • You will be able retain certain household goods and a reasonable amount of money for living expenses.

  • When the bankruptcy order ends, you can make a fresh start.

  • Creditors will cease action to get their money back.

  • The money you owe is usually written off.

While there are some advantages to having a fresh start with bankruptcy, the cost far outweighs the benefits. Learn how you can get out of debt and stay away from bankruptcy by reading how to create a debt repayment plan and ways to reduce debt.

If you do file for bankruptcy, learn how to bounce back.

Benefits of Debt Consolidation

  • Lower Interest Rates
  • Lower Monthly Payments
  • Eliminate Debt in Less Time
Learn About Debt Consolidation