If you find yourself heavily in debt and can’t see any way out, you might be tempted to file for bankruptcy. You will need an attorney but bankruptcies have become so common place that attorneys are actually competing for them. So you can probably get one to handle your case for around $500.
The advantages of filing for bankruptcy
Of course, the most obvious advantage is that you can use a chapter 7 bankruptcy (the most common type) to discharge most of your unsecured debts, including credit card debts. Second, once you file for bankruptcy, there is an automatic stay so that most of your creditors must stop trying to collect from you. Plus, a bankruptcy is fairly fast as it can usually be completed in about a year.
The downside of a chapter 7 bankruptcy
Before you rush out to file for a chapter 7 bankruptcy, it’s important to understand that there are pitfalls. For one thing, it will not discharge all your debts. A chapter 7 can’t free you of student loan debt, past child support or alimony payments, income taxes, court fines, DUI judgments or any debts you incurred fraudulently.
In addition, you will lose all your credit cards and you probably won’t be able to get a mortgage or a loan for six years or more. You may also lose any tax refunds you would ordinarily get from federal or state governments.
What you can keep, what you may lose
If you choose a chapter 7 bankruptcy, you will most likely keep the equity in house, your automobile (up to a certain value), work related tools and your personal clothing. But you may lose what are called “non-essential” possessions such as a boat, personal watercraft or trailer.
At least six years
A bankruptcy will stay in your credit record for at least six years and maybe longer. This means six years during which you may not be able to get any new credit at all. You could have a problem renting a house or apartment or even getting a new job as some employers won’t hire a person who has had a personal bankruptcy. And, finally, it’s kind of embarrassing to have to admit you couldn’t manage your finances and had to file for bankruptcy.
There are several ways to deal with debt that don’t involve the same stigma as filing for bankruptcy and don’t require you to lose any of your possessions. The first of these is to get a debt consolidation loan. The biggest advantage of this type of loan is that it gives you more time to pay back your debt, which translates into a lower monthly payment. Also, it means writing only one check a month vs. the dozen or so you may be writing now. And it will get all those other creditors off your back.
A second way to deal with debt is via debt settlement. This is where you negotiate with each of your creditors to cut your debt by thousands in return for which you agree to pay it off as a lump sum. This will also go on your credit record because in order to get your creditors to agree to a settlement, you’ll have to stop paying them for probably six months. And any time you stop making payments on your debts for this much time, it’s bound to have a negative effect on your credit record. For many settling with creditors is a better alternative to filing for bankruptcy.