There are numerous valid reasons to file for bankruptcy protection. But prior to contacting an attorney and filing the necessary papers with your local court system, consider the damages and consequences that result from a bankruptcy. Based on this information, determine whether you can or should avoid the bankruptcy process.
Purpose of Bankruptcy
As an individual debtor you can file either Chapter 13 or Chapter 7 bankruptcy protection from creditors. Applying for and obtaining loans and credit cards involves an agreement to repay these debts. Even with the best intentions, some debtors find it difficult or impossible to pay outstanding balances. Creditor calls, letters and lawsuits prompt many to file bankruptcy to possibly eliminate debts and start over. A judge hears and reviews the bankruptcy filing, and he may decide to discharge debts through a Chapter 7 bankruptcy, which eliminates all debt obligations to creditors. With Chapter 13, debtors develop a plan to repay creditors over a period of three to five years. Both bankruptcies damage credit scores equally; however, a Chapter 7 bankruptcy stays on credit reports for 10 years, whereas a Chapter 13 bankruptcy only stays on reports for seven years.
Effects of Bankruptcy
Some debtors do everything possible to avoid bankruptcy to protect their personal credit rating. The average credit score drop after bankruptcy is 100 points or more, according to the Consumer Credit Counseling Services website. Credit scores impact several areas of life, including mortgage and auto loan approvals, credit card approvals and interest rates. People with high credit ratings are more likely to obtain loan and credit card approval and at lower interest rates than people with poor credit. A bankruptcy also can affect your ability to rent a house or apartment, increase your insurance rates and limit employment opportunities (especially in banking and government jobs). Typically, considerable damage has already been done to your credit score before filing bankruptcy as a result of the delinquencies, collection accounts and judgments that led to your bankruptcy. One advantage of bankruptcy is that it erases negative items such as judgments, late payments and collections from your credit report.
Postpone Buying Home
Because bankruptcy significantly damages personal credit scores, obtaining approval for a mortgage loan afterward is often difficult. In fact, most lenders will not approve someone with a recent discharge of debts on his record. Instead, these borrowers typically have to wait two years after a discharge, and qualifying for a mortgage will require rebuilding a low credit score. Credit damage that results from filing bankruptcy gradually dissipates over time, especially if debtors improve their credit habits by paying bills on time and keeping debts low. The negative effect of a bankruptcy is almost gone by the time it is removed from your credit report (in either seven or 10 years), assuming you have made payments on time in the meantime.
Avoiding Bankruptcy
Bankruptcy is inevitable in some situations. But, if possible, avoid filing bankruptcy by satisfying your debts. Creditors lose money when debtors file bankruptcy, and, as a result, creditors may be open to negotiating a debt settlement to avert a bankruptcy filing. A debt settlement allows you to satisfy your debt obligation by paying less than the amount you owe.
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