It is very common these days for individuals to be burdened with debt. And despite this being a common problem, it seems that few people are informed when it comes to the implications of filing for bankruptcy, good or bad. For instance, there are those who are plagued with an overwhelming mountain of debt, who do not consider bankruptcy despite the financial relief it could provide. On the other hand, there are those with relatively manageable financial obligations who are too hasty to file bankruptcy. Becoming informed about the effects of filing for bankruptcy can help those in financial straits determine if filing could perhaps provide a viable solution.
How will filing for bankruptcy affect my credit?
Generally speaking, filing for bankruptcy always has a negative impact on the filer’s credit score. The question lies not in whether bankruptcy will show up on a credit report, but rather in how big of an effect the bankruptcy will have. Here are some things to examine when considering whether to file for bankruptcy:
- What is the credit score prior to filing for bankruptcy?
o Those with relatively good credit will notice a significant drop in their credit rating.
o Those with poor credit may only notice a small drop in their credit score. - How many lines of credit are included in the filing?
o Those with numerous credit accounts will see a more significant drop in their credit score.
o Those with fewer credit accounts may realize a smaller impact from filing for bankruptcy. - The bankruptcy will affect the filers credit for up to seven years, possibly even ten years, is it still advantageous to file?
o Until credit is repaired, individuals who file for bankruptcy will have difficulty purchasing anything on credit, be it a home, a car or other goods.
What are the different types of bankruptcy for which I can file?
There are two basic bankruptcies for which individuals may file, Chapter 7 and Chapter 13:
- Key Traits of Chapter 7:
o Those who file for Chapter 7 must liquidate all unexempt assets and use the proceeds to pay creditors.
o Exempt assets which filers may retain include many of life’s necessities, such as equity in a primary residence, equity in a reasonably priced car and home furnishings.
o Creditors collect on loans according to the type of loan they made; secured debt is repaid first, and any remaining money is divided among creditors with unsecured loans. - Key Traits of Chapter 13:
o Those who file for Chapter 13 are afforded an opportunity to reorganize their debt to improve their financial status.
o Rather than absolve the debt, as in Chapter 7, those who file for Chapter 13 must contact creditors and restructure the terms of the loans.
o Those who file for Chapter 13 are expected to continue with business as usual, except operating under the newly restructured repayment program. If filers of Chapter 13 are unsuccessful at abiding by the new terms, they may file for Chapter 7 and liquidate their assets.
How can I repair my credit after filing for bankruptcy?
While those who have their debts discharged in a bankruptcy proceeding become free from at least a portion of their financial obligations, they are still burdened with a poor credit rating. For this reason, it is imperative that those who file for bankruptcy follow up by rebuilding their credit. There are a few things which individuals can do to begin rebuilding credit:
- Obtain a credit card with a low interest rate and make small purchases with it. Individuals should pay the balance each month to avoid further financial troubles.
- If unable to obtain a credit card, individuals should work with their banks to obtain a secured credit card.
- Individuals should also consider obtaining credit cards from department stores or gas companies; here again, it is critical to pay off the balance on a monthly basis.
- Individuals should view bankruptcy as an opportunity to learn financial responsibility, not as a fresh start at frivolous expenditures. Good budgeting is very important, and individuals should evaluate their expenses to eliminate those things which are not necessary.
Why is it important to have an attorney assist in filing for bankruptcy?
Filing for bankruptcy, whether Chapter 7 or Chapter 13, is more complicated than filling out a form and automatically becoming absolved from debt. Those who file for bankruptcy must petition the court and then adhere by strict timelines and rules in order to eventually have their debts discharged. Moreover, filers must meet with creditors and often times handle creditors’ objections to the discharge. For individuals without experience and knowledge in this process, filing for bankruptcy can be overwhelming. Experienced legal counsel can provide the guidance and direction necessary to have debts discharged in a bankruptcy proceeding.
