Bankruptcy considerations. Just the thought can overwhelm. But, anyone confronting a mountain of debt should weigh the pros and cons.
First, calculate how long it will take to pay off your debts. Throw all credit cards in a drawer. Figure how much over the minimum payments you can make each month. Then, determine when you will be paid in full. Make a budget, starting out with your total monthly income. Fit your needs into what you make. If the numbers don’t work, bankruptcy is an option.
Types of Bankruptcy
The three most common types of bankruptcy include consumer liquidation or “Chapter 7″ because it falls under Chapter 7 of the U.S. Bankruptcy Code. Chapter 13 allows people to repay their debts under a plan over time, under court supervision, often for only a percentage of the full amount of the debt. Chapter 11, reorganization, usually involves a corporation or other business, and allows the debtor to propose a plan to keep the business going while paying creditors over time.
Bankruptcy Stay Stops Debt Collection
Upon filing a proper bankruptcy petition, an automatic stay goes into effect stopping most debt collectors dead in their tracks. In the end most debt is discharged.
Are All Debts Covered by Bankruptcy?
Not all debts are affected by bankruptcy. You cannot stop child support or alimony. The IRS can continue certain proceedings. Court ordered payment of damages caused by drunk driving accidents cannot be discharged. Student loans are almost never discharged, and only under extraordinary circumstances.
Foreclosures are initially stopped by the bankruptcy stay. In a chapter 7, this gives you only a little breathing room. Unless you can pay the arrearage or quickly modify, the stay will be lifted for the foreclosure. However, under a chapter 13 plan, the foreclosure is stopped for the duration of the case, giving the bankruptcy filer the opportunity to catch up on arrearages.
Bankruptcy and Future Credit
Once you get a chapter 7 discharge, you can’t file another chapter 7 for eight years. Bankruptcy generally remains on your credit record for 10 years.
Credit can be rebuilt, often starting out with “secured” credit cards. Then, after a while the credit companies actually seek you out because you can’t file another bankruptcy for a long time. They figure they’ll just chase you until you pay.
That’s one of the reasons there’s mandatory credit counseling for bankruptcy filers.