How to Know If Bankruptcy is Right?

There’s a negative stigma attached to bankruptcy, but the truth is that it’s the only way out for many consumers struggling with bad credit. When credit repair isn’t working, how do you know if bankruptcy is the path you should take?

The benefit of bankruptcy is that it temporarily stops collection activity on most of your debts. Once you file bankruptcy, you get what’s called an automatic stay. This action prevents creditors and collectors from calling you, sending letters about your debts, garnishing your wages, or levying your bank account. You may even able to stop foreclosure and eviction after filing bankruptcy. Note that some creditors may get special permission from the court to keep collecting from you.

Two Types of Bankruptcy

If you have mostly unsecured debt, like credit cards and personal loans, Chapter 7 bankruptcy can help you eliminate your responsibility for these debts. To file Chapter 7 bankruptcy, you must pass a means test showing that your income is less than your state’s median income. In some states, some of your property, like your home or car, could be sold and used to pay your creditors.

Chapter 13 bankruptcy is the best option for filers who have secured debts, assets you don’t want seized by the court, or those who make too much money to file Chapter 7 bankruptcy. Chapter 13 bankruptcy allows you to repay your creditors over a three- to five-year period of time. At the end of that time, anything debt that’s left is discharged.

Is Bankruptcy Right?

If you’re considering tapping into your retirement or your children’s college fund to repay debt, instead consider filing bankruptcy. Those assets are typically exempt from bankruptcy and won’t be taken by the court if you choose to file.

You’re behind on your mortgage, but have the ability to catch up and want to keep your home. If you can afford to make your regular mortgage payment plus an additional catch-up payment, you can use Chapter 13 bankruptcy to keep your home. You’ll end up paying back the past due mortgage payments over three to five years.

Depending on your state’s laws and the amount of equity you have in your home, you can file Chapter 7 bankruptcy to simply get rid of your unsecured credit card and loan debt. Meanwhile, you’ll be able to keep your house if you’re caught up on your payments and don’t have much equity. Some states, like Florida, let you keep your home through bankruptcy no matter how much equity you have.

You have expensive medical bills that you can’t afford and can’t negotiate. Even with health insurance, your medical bills can get so high that you can’t afford to repay them. As a last resort, you may use bankruptcy to eliminate your responsibility for medical debt.

Bankruptcy Consequences

Bankruptcy certainly has some negative consequences. You’ll be unable to refile bankruptcy for two to eight years depending on which type of bankruptcy you file. If you get yourself into more debt within that time, you’ll have to struggle through it. Bankruptcy does hurt your credit, but if you’re score is already ruined because of delinquencies and collections, your credit score won’t fall much more. Bankruptcy remains on your credit report for seven to ten years, but you may be able to begin credit repair within two years after filing bankruptcy.

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