Job loss, divorce or illness can reduce income, and if you're unable to pay your bills, you may consider bankruptcy as a solution to overwhelming debts and creditor harassment. However, there are consequences to filing bankruptcy and limits to how often you can petition the courts for help.
Definition
Consumers can file either a Chapter 7 or Chapter 13 bankruptcy. Both types of bankruptcies help with debt management. Under a Chapter 7 bankruptcy, debtors can possibly have debts eliminated or discharged by a court, whereas a Chapter 13 bankruptcy reorganizes debts and debtors must repay a percentage of outstanding bills through a repayment plan. Bankruptcy can help debtors get back on track and give them a fresh start.
Consequences
The dissolution of some or all debts is a major advantage of filing bankruptcy. But it comes with a hefty price. Credit scores decrease significantly after a bankruptcy. Some debtors cannot qualify for mortgage loans, auto loans and credit cards until they rebuild their credit history and raise their low credit scores. In addition, bankruptcy information stays on credit reports for 10 years.
Time Frame
Debtors can file bankruptcy multiple times. However, there are limits to how often a debtor can submit a petition for bankruptcy. Debtors who have filed a previous Chapter 7 bankruptcy can file for another Chapter 7 after eight years. On the other hand, if filing a Chapter 7 after a prior Chapter 13, debtors must wait six years before petitioning the courts. Debtors can petition for another Chapter 13 two years after a prior discharge, and four years after a previous Chapter 7.
Considerations
Bankruptcy is severely damaging to your credit history. Even if you're behind on existing payments to creditors, working with creditors to negotiate an affordable payment amount or plan can help rectify your debts without a bankruptcy petition. Once aware of your financial hardship, your creditors may reduce your interest rate on loans, decrease your monthly payments or defer payments until your finances improve.
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