What to Consider Before Filing Bankruptcy

If you’re overwhelmed by debt and have exhausted all other options for repaying your creditors, filing for bankruptcy may be your only option. It may even come as a relief. However, doing so has significant consequences for your credit and your ability to borrow money in the near future, so it’s important to weigh all your options before moving ahead.

Bankruptcy is a federal judicial process that protects people in serious debt from being sued or otherwise forced into financial ruin by their creditors. It prevents creditors from pursuing debts and may erase, or discharge, some debts altogether.

However, bankruptcy cannot discharge all debts. Depending on the type of bankruptcy protection you qualify for, it may also require you to make full or partial repayment to your creditors and/or demand that you forfeit property that can be sold to help meet your obligations.

Types of Bankruptcy

Federal law provides several categories of bankruptcy protection, applicable to different types of debtors (such as individuals and corporations) and detailed as chapters of the bankruptcy law:

Chapter 7

Chapter 7 bankruptcy is also called liquidation bankruptcy because it compels a court-appointed trustee to sell your nonexempt property and use the proceeds to repay your creditors. You get to keep certain exempt assets and possessions, valued up to a limit that varies by the type of asset and its monetary value. When the process is over, the remainder of your dischargeable debts are erased.

Chapter 13

Chapter 13 bankruptcy is for individual debtors and couples with sufficient income to make full or partial repayment to their creditors. Also called reorganization bankruptcy, it establishes a schedule of monthly payments lasting three or five years, depending on your income level. If you make all required payments over that time, the court discharges any qualifying debts that remain.

A major advantage of Chapter 13 is that it can enable homeowners who’ve fallen behind on mortgage payments to get caught up and keep their homes.

How Does Filing for Bankruptcy Affect Your Credit?

A bankruptcy is considered one of the most severe negative entries that can be recorded on a credit report, with deep and long-lasting adverse effects for credit scores for as long as it stays on the report.

A Chapter 7 bankruptcy stays on your credit report for 10 years from the date you file your petition with the court. A Chapter 13 bankruptcy remains on your credit reports for seven years from the filing date.

The appearance of a bankruptcy on your credit reports might not actually reduce your credit score by many points, because bankruptcy typically follows a period of multiple missed payments and other negative events that hurt your scores. Credit scores severely damaged by other events may not drop much further in the wake of a bankruptcy, but they may take longer to rebound than they would without the bankruptcy.

Alternatives to Bankruptcy

Some alternatives you might consider before filing bankruptcy include:

Debt Consolidation

Using a relatively low-interest loan to pay off multiple high-interest debts is a time-tested strategy, with benefits that include lower interest charges and replacing multiple monthly payments with a single more manageable one. If your credit scores aren’t too damaged by missed payments or other missteps, consider researching debt consolidation loans to see if one can improve your circumstances.

Debt Management Plan

Seek advice from a certified nonprofit counselor and explore the option of a debt management plan (DMP). The counselor can work with your creditors to help arrange a workable plan for repaying some or all of what you owe. This typically results in closure of your accounts and can leave your credit bruised, but effects are typically less severe and shorter-lived than those of bankruptcy.

Creditor Negotiations

Ask your creditors about working out an agreement to reduce your interest rate or lower your minimum required payment. If your debt problems are temporary, your lender may agree to forbearance or a hardship agreement, which can reduce your payments for a period of time while you get back on your feet.

When to File for Bankruptcy

Once you have consulted with financial and legal experts and determined you have no other practical alternatives, filing for bankruptcy sooner than later can bring an end to anxiety over crippling debts and your creditors’ efforts to collect them. Working with an attorney can smooth the process and ensure thorough, timely submission of all documents required by the court.

Whichever procedures are applicable to you, the bankruptcy process can eventually free you from your obligations and give you a clean slate for rebuilding your credit and your financial life.

The Bottom Line

The decision to file bankruptcy is never an easy one, but under certain dire circumstances it can be the best decision, if not the only one. The road to restoring your credit and financial health after bankruptcy can be a long, challenging one, but millions of Americans have endured it and recovered. You can as well.

If you need expert advice on managing your mortgage or exploring your options, contact O1ne Mortgage at 213-732-3074. Our team of professionals is here to help you navigate through your financial challenges and find the best solutions for your needs.