For many consumers, bankruptcy is seen as a drastic way to get out of debt once and for all. While filing a petition with the bankruptcy court makes sense for some people, there are better ways of getting out of debt. For example, many American consumers have been told that going through the bankruptcy process is a good way for them to “wipe the slate clean” or completely erase all their debts. While this is true for some situations, it may surprise you to learn that bankruptcy will not help you as much as you thought it would.
Is Bankruptcy Right For You?
Before deciding if bankruptcy is right for you, it is important to understand exactly what filing for personal bankruptcy means. If you choose to file for bankruptcy, a judge will look at your personal financial situation and decide what bills you should pay. This is known as a means test. In most cases, the judge follows the guidelines set forth by your state of residence. Since these rules vary from state to state, many people choose to hire a bankruptcy attorney to help them through the filing process.
After the initial court filing, the process typically takes about six months to a year to complete, but it can take much longer in very complicated cases. After reviewing the case, the judge will decide which of your debts can be completely discharged, which debts can be discharged with conditions, and which debts you will still need to pay.
Discharge Your Unsecured Debts With Bankruptcy – If You Qualify
In general, a bankruptcy filing will help people who have unsecured debts to have these debts fully discharged – only if you qualify for Chapter 7 liquidation. These bills include credit card debt, personal loans, payday loans, and medical debt. When these specific types of debts are registered while filing for bankruptcy they are usually completely discharged. This means that you will not have to make payments on these bills ever again.
Many people cannot qualify for Chapter 7 liquidation because they cannot pass the means test – you can thank the major credit card companies for those rules.
Another class of debts known as secured debts, however, are trickier to discharge or get of rid through a bankruptcy. This class of debt includes mortgages, car loans, business equipment loans, and any other loan that has an asset attached to it. In general, a bankruptcy court will usually make you give up or forfeit the asset that is backing one of these loans in order for the debt to be discharged. While this can be a good option if you are currently underwater on your house or upside down on your car note, it may be a bad choice if you have some equity in these assets.
Debts Not Discharged Through Bankruptcy
It is important for you to realize that there are some debts that by law can never be discharged during a bankruptcy. Student loan debt, alimony, federal tax debt, and back child support payments cannot be discharged during a bankruptcy. People who have these types of loans are often told to look to other sources for debt relief.
Odds are, however, that you have a combination of all three of these types of debt. This means that filing for bankruptcy will clear some of your debts, but you will still be required to make payments on other debts.
The Many Costly Consequences Of Filing Bankruptcy
Of course, there are several negative consequences of going through a bankruptcy. The first one that you’ll probably notice is that it will completely wreck your credit score for years. Filing for bankruptcy is one of the most damaging things you can do to your credit. Expect your score to drop by at least two hundred points immediately after filing.
People who already have extremely low credit scores, however, do not see this as much of a problem. If your FICO score is already below 500, there isn’t much more damage a bankruptcy can do. The term “bankruptcy” will appear on your credit report, however, and will not be removed for seven years.
The term “bankruptcy” on a credit report has the potential to scare away banks, insurance companies, and even potential employers. If you’re currently working or hoping to work in the finance industry or any money-related field, it will become extremely difficult to find a job with a bankruptcy on your credit report. Many security positions will refuse to hire people who have ever filed for bankruptcy as well.
For these reasons, filing bankruptcy should only be used as a last resort. If you’re thinking about filing for bankruptcy, look into your options with credit counseling and debt settlement first as less severe alternatives. Companies that offer these services can often help you to have your loan balances reduced and your payments restructured so that you can afford your debt again. In addition, the effects on your credit will not be nearly as harsh.
Call us today or fill out the form to get more information on debt settlement and how it can help you to avoid bankruptcy but get better debt relief. Yes, you can get better savings on your debts with debt negotiation and settlement compared to bankruptcy. Plus, the direct and indirect costs are much lower than bankruptcy court. Check out the alternatives to bankruptcy before you hire a lawyer.