If you’ve reached a tipping point with your debt and a manageable pay off plan seems completely out of reach, bankruptcy might appear to be the only viable option. And, when compared to the prospect of spending another several years scraping by under debt’s heavy hand, a clean slate might even start to look pretty attractive.
While there are certainly financial advantages to starting over, the downsides — like having a black mark on your credit report for up to a decade afterwards — makes this a decision worth spending quite a bit of time on.
Before throwing the towel in on your debt, here are a few questions to ask yourself.
When is Bankrupcy the Right Choice for Me?
1. Am I eligible to file for bankruptcy?
There are two main types of bankruptcy filings in the United States: chapter 13 and chapter 7.
Chapter 13 bankruptcy essentially creates a plan for the debtor to pay back their creditors within a three to five year time span. During this time, collection practices must cease and all payments collected under the plan are distributed to creditors by a trustee.
This type of bankruptcy filing can prevent you from losing your home, protect your cosigners, and potentially allow you to pay less in monthly payments. To be eligible, your unsecured debts must be less than $383,175 and secured debts must be less than $1,149,525. (Find more eligibility requirements here.)
Chapter 7 bankruptcy is what many people think of when they consider bankruptcy — a trustee of the court gathers and sells nonexempt assets and the proceeds are used to pay creditors. In exchange for wiping the slate clean, the debtor will likely lose property in the process (if they have any to lose).
To be eligible, your income must be determined to be low enough to make repaying debts a significant hardship. (Find out more here.)
2. Do I have other options?
When creditors are calling and debt is piling up, bankruptcy might seem like the only way to reach a place of financial peace. But there might be other options with less painful consequences in the long run.
Here are a few steps to consider taking first:
- Negotiate with your creditors and see if there are options for making your debts more manageable, like lowering interest rates or settling for less than you owe.
- Speak to a credit counseling agency about your financial picture and how they can help you get back on your feet.
- Sell items you can live without in order to settle your debts on your terms. This way you can control what you earn and pay creditors without the damaging financial effects of filing for bankruptcy.
3. Is filing for bankruptcy able to help my financial situation?
Bankruptcy doesn’t treat all debt equally and might not be able to wipe out the debt that is having the greatest impact on your financial health.
For instance, unsecured debt like credit cards, can be addressed and cleared rather easily through bankruptcy. However, secured debt is much trickier. If a creditor has a lien on your property because of an unpaid debt, bankruptcy court can’t remove that lien. In addition, child support, alimony payments, student loans, and tax debts generally can’t be removed through bankruptcy.
4. Am I ready for what happens after I declare bankruptcy?
As with any decision you make, there are consequences to filing for bankruptcy and you should be prepared to face them should you travel down this path.
Bankruptcy will stay on your credit report for 7-10 years.
While you shouldn’t be concerned with obtaining credit immediately after filing for bankruptcy anyway, the damaging effects could last a whopping 7-10 years after the fact. Are you prepared to change your financial decision-making accordingly?
Bankruptcy filings are open to the public (and potential employers).
You may think your financial matters are private, but bankruptcy filings are public domain. Considering some employers are looking into the finances of potential job candidates, this could impact your employment status.
Filing for bankruptcy is another financial obligation.
You might be looking for a break, but you probably won’t find it in the cost of filing for bankruptcy. You could end up paying several thousand if you factor in attorney’s fees – an amount that could add unneeded financial pressure after everything is said and done.
The bottom line: Exhaust all options first
Bankruptcy is certainly not a decision to take likely. While it might sound like a less painful option, it could actually be far more devastating, depending on your specific situation. Make sure you consider all factors – now and into the future – before signing on the dotted line.
If you have more questions than answers, DebtWave can help. Call 1 (888) 686-4040 to speak with one of our certified counselors now or request a call by filling out our Free Credit Review form.