If you're faced with overwhelming debt, you may be considering whether bankruptcy is the best option. Bankruptcy does have several advantages, however; bankruptcy causes a huge hit to your credit rating, and it stays on your report for up to 10 years. There are alternative strategies that may be a better choice for your circumstances. If you do decide to file bankruptcy, you'll need legal help, like a lawyer or a legal document service, to deal with the confusing paperwork and complex procedures involved.
If you have few assets and little income, Chapter 7 may be your best option. Chapter 7 results in a discharge of all your eligible debts. Once you file your petition, creditors must stop all attempts to collect what you owe them. If you're worried that you'll lose everything in a Chapter 7 bankruptcy, don't. The court allows you to claim many of your possessions, such as clothing and personal effects, as exemptions that cannot be liquidated, or sold to pay creditors. However, depending on your state, if you have a home with a large equity, the trustee may force you to sell it. Once you file Chapter 7, you cannot file another Chapter 7 petition for eight years.
Chapter 13 reorganizes your debts, and is often a good option, if you have a steady income that's sufficient to meet your basic obligations. You work with a trustee and your creditors to establish a payment plan that will settle your financial obligations. Since Chapter 13 doesn't involve liquidation, you're more likely to be able to keep your house or car than with Chapter 7. Chapter 13 also protects any cosigners you have from collection efforts; Chapter 7 does not. Just as with Chapter 7, once you file your petition, creditors must stop all collection efforts. However, unlike Chapter 7, which can often be settled in a few months, Chapter 13 payment plans often require several years to complete.
What Bankruptcy Doesn't Cover
If you file Chapter 7 bankruptcy, your obligation to pay your debts disappear, which means you don't have to worry about unsecured debts like credit cards anymore. However, for secured debts, the creditors' liens on the property remain, even though your obligation to pay the debts is discharged. That means that even if your house and car are covered by your exemption, you have to stay current on the payments until the debts are paid in full, or your lender may seize them. In addition, neither Chapter 7 nor Chapter 13 bankruptcy discharges most tax obligations or student loans. You also cannot use Chapter 7 or Chapter 13 to get out of paying child support.
Alternatives and Considerations
Debt consolidation offers an alternative to filing bankruptcy. If you go that route, check out the debt consolidation agency thoroughly -- many so-called consolidation agencies are actually scam operations. Be wary of consolidating unsecured debts into a home equity loan or other secured debt unless you are very sure that you can pay off the loan on time and that you won't run up more bills. Re-evaluate your finances -- perhaps you can move to a smaller home or take a second job to avoid bankruptcy altogether.