Bankruptcy is a legal process intended to help individuals and companies who are unable to meet their debt obligations. Bankruptcy can help you get control of your financial situation and help you maintain possession of property to which creditors might have a legal claim. The process can have very negative effects on your ability to borrow money for quite a long time (up to ten years), but there are circumstances where bankruptcy might be the best option.
There are two types of bankruptcy for individuals: Chapter 7 and Chapter 13. The two types work quite differently. When filing for Chapter 7, most of your unsecured debt disappears within 90 days. However, much of your property, including your home, will be sold off, with the proceeds distributed to your creditors. Basically, anything you have that is worth much at all will be sold to pay creditors. In addition, a Chapter 7 bankruptcy stays on your credit report for ten years. So Chapter 7 bankruptcy is no laughing matter.
A Chapter 13 bankruptcy lets you keep your property. This form of bankruptcy is a debt repayment plan, rather than a debt eliminator. With Chapter 13, you generally set up a three or five year repayment plan, and the bankruptcy only stays on your credit report for seven years. If you own property that you do not wish to relinquish to creditors, Chapter 13 may be your best option. Chapter 13 is also a better option for those who are having temporary difficulties but anticipate better times ahead because it has somewhat less of a long-term impact on credit ratings.
If you do not own a lot of property or are comfortable with the idea of relinquishing your property, then Chapter 7 may be the best option. It creates the best financial circumstances, from a debt management perspective, because it erases your debt. You are no longer responsible for debt repayment. How much property you must give up depends on the laws of the state where you live. But forget about moving to a state with better consumer bankruptcy laws in order to get a better deal. If you've lived in a state for less than two years, then you must abide by the bankruptcy laws in the state where you formerly lived.
If your credit score is already ruined from multiple missed payments or from being in default with creditors, then declaring bankruptcy won't have much of a negative impact on your credit score. In fact, it might even help your credit score. This is because once your declare bankruptcy, your balances and records of unpaid debts are removed. All of those debts will be marked as being included in a bankruptcy. So even though having the bankruptcy on your credit report is very negative, it may be offset by the removal of multiple active bad debts.
Since you are basically starting from scratch, you have the opportunity to begin rebuilding your credit anew. A good way to begin that process would be by acquiring a secured credit card. After being careful to make all your payments on the secured card for a year or two, you will be in position to apply for an unsecured card and continue the process of rebuilding your credit. Eventually, after seven or ten years, the bankruptcy will slide off your credit report. If you have made timely creditor payments in the meantime, then your credit will be restored.
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