Some consumers are so deeply in debt that bankruptcy may be the last best option for becoming debt-free and starting to rebuild their credit score. The federal government offers two types of bankruptcy, one that eliminates debt and one that allows the consumer to restructure their debts so they can repay them. Anyone can apply for bankruptcy, regardless of how much debt they owe.
Types of Bankruptcy
There are two types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy allows the filer to give up their material possessions in lieu of paying debt. Chapter 7 is for people who have little assets and no income. However, many people do not qualify for Chapter 7. If someone wishing to file Chapter 7 can afford to make small monthly payments on their debt, they must file for Chapter 13 instead. With Chapter 13 bankruptcy, filers will enter into a payment plan for repaying their debts. However, mortgage holders cannot foreclose on the filer's home and collectors must stop trying to collect debts through the duration of the repayment plan.
Eligibility
There is no minimum or maximum amount of debt a person can owe before he files for bankruptcy. Anyone can file for Chapter 7 bankruptcy once every six years. However, the filer must have little or no income to pay back their debts. Anyone who files for Chapter 13 bankruptcy must complete a financial management course approved by the government. Anyone applying for either Chapter 7 or Chapter 13 bankruptcy must also get credit counseling from a federally approved counseling agency 180 days before they can file, according to Bankrate.
Effect
Bankruptcy claims go on your credit report. Chapter 7 bankruptcy will remain on your credit report for 10 years and Chapter 13 bankruptcy will remain on your credit report for seven years. Having a bankruptcy listed on your credit report will make it difficult for you to open new credit cards, qualify for a loan or purchase a home. If you are able to open new credit accounts, you will likely have high interest rates, annual fees and other charges.
Tips
Consumers who file bankruptcy can work to lessen the damage to their credit report by responsibly managing their credit going forward. As the bankruptcy files ages, it will have less of an effect on your credit score. By getting a secured credit card or a small personal loan and making timely payments every month, you can start to improve your credit score over time.
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