It’s like pushing a financial reset button. And for filers, that fresh start comes with its own set of gifts and liabilities. If you’re considering bankruptcy, or just want to know more about it, here are 14 key factors to consider:
- There are two main types of personal bankruptcy. Chapter 7 allows the filer to walk away from debts entirely. This option is used by those whose debts are so high or income so low that after basic expenses they don’t have the money for a payment plan. Chapter 13 allows the filer to draft a plan to repay all or part of the debts over three to five years.
- Don’t use bankruptcy frivolously. People turn to bankruptcy when they have major life events that significantly reduce their income, increase their bills or both. The most common reasons for bankruptcy: divorce, unemployment and medical bills. Filing bankruptcy also halts, at least temporarily, collection attempts and foreclosures. If you’re unemployed or recently re-employed but facing foreclosure because of missed payments, Chapter 13 can help you save your home.
- Where you live matters. When it comes to which assets you can keep in bankruptcy, rules vary widely by state. In addition, income and expense limits used for determining whether you qualify for a Chapter 7 will vary by location.
- You get to keep assets. Filing bankruptcy doesn’t mean giving up all your possessions. You keep your personal property, such as clothes, electronics, household furnishings and other exempt assets. Depending on your state laws, the type of bankruptcy you file, and your finances, you can sometimes retain larger assets, such as cars and the family home.
- The two types of bankruptcy are very different tools. If you were out of work and got behind on the house payments but can now meet your mortgage, a Chapter 13 might be your best option. If you don’t own a home but are struggling with medical bills, then Chapter 7 might be a better choice. Like any major financial decision, you should consult an Attorney.
- You have to qualify for a Chapter 7. Consumers must show through income (if they are below the state median) or through both income and expenses (if they are above the state median) that they can’t repay their debts.
- Bankruptcy goes on your credit history. The safe rule of thumb: A bankruptcy will stay on your credit history about 10 years. But the older that bankruptcy is, the less power it has to scare lenders and impact your credit score.
- A bankruptcy doesn’t protect joint account holders. A bankruptcy dissolves your obligation to a creditor. But if anyone else is also on the hook for one of your debts, such as a joint account holder or co-signer, your bankruptcy makes that bill his or hers alone. And that’s a situation that commonly occurs after a divorce.
- It’s public. The world, if they’re interested, can see everything about your financial situation in the last few years.
- You’ll have to go to class. Before you file, you’ll be required to take a 90-minute credit counseling class, and before your bankruptcy is officially concluded, you’ll take a second, two-hour session. You can attend in person, by phone or online.
