Filing For Bankruptcy? Here are 5 Things You Should Know First

Whenever you hear the word bankruptcy, it usually has some sort of negativity attached to it. People mostly file for bankruptcy due to medical debt from an illness, a divorce or an unexpected job loss. Bankruptcy allows people in these, and other situations, to start over financially. So what exactly is bankruptcy? According to debt.org, bankruptcy is a court proceeding in which a judge and court trustee will examine the assets and liabilities of individuals and businesses who can no longer pay their bills and may discharge those debts so they are no longer legally required to pay them.

There are a few things that you should keep in mind before declaring bankruptcy that can help you down the road. Keep reading below to find out 5 facts about bankruptcy.

1. There is more than one type of bankruptcy
There are several types of bankruptcy, and consumers typically use Chapter 7 and Chapter 13. Chapter 7 bankruptcy is also known as “liquidation” and discharges most unsecured debt which includes personal loans and credit cards. Chapter 13 bankruptcy is considered a “reorganization” option and allows you to set up a repayment plan to pay back creditors over a set period of time. This process can take anywhere from 3 to 5 years and requires that you have a regular income in order to make payments.

2. Your credit will be affected
There are long-term penalties that come with bankruptcy and it will remain on your credit report for 7 to 10 years. 35% of your credit score is made up of payment history, so it will definitely hurt your credit. This can make it a little difficult for you to apply for new credit such as credit cards, auto loans or a mortgage. Another key thing to keep in mind is that you may be asked in future employment applications if you have ever declared bankruptcy. You will have to select “Yes” next to this question for the rest of your life if you declare bankruptcy.

3. Not all debts are forgiven
Not all debts are discharged when you declare bankruptcy as some debts will remain in your credit file. There are some options that you can consider for debts that aren’t forgiven such as a debt elimination strategy and loan refinancing. A debt elimination strategy will allow you to organize your debts and pay down your balances and eventually eliminate them. Some of the things you can do are pay more than the minimum payment on your credit cards and using the snowball effect of paying off lower balances first and eventually paying the larger balances. Loan refinancing allows you to renegotiate the terms of your loan so that it’s easier to pay down loans.

4. Bankruptcy costs money
When filing for Chapter 7 bankruptcy, you will have to hire an attorney which will be a major cost. The amount you pay can be a flat fee or a fee based on the amount you owe, but will vary by attorney. This cost can range from hundreds to even thousands of dollars.There is also a filing fee which costs a few hundred dollars but can be waived if you apply for and are approved for a fee waiver. Since Chapter 13 can take several years to settle, it will usually cost more than Chapter 7 bankruptcy.

5. There is a positive side
Although going bankrupt is not the most positive experience, declaring bankruptcy gives you the ability to “start over” with your finances. Take this time to review your past spending habits, credit and see where things went wrong. Check out this video from the Keeping It Real With Credit YouTube Channel on what you should know before filing for bankruptcy: