SHOULD I FILE FOR BANKRUPTCY?
CONSIDERING BANKRUPTCY
If you’re considering bankruptcy, it means you have serious debt. Bankruptcy can be an opportunity to rebuild finances, but it comes with a serious long-term hit to your credit worthiness. Before filing , make sure you’ve looked at all the debt relief options and considered what is right for you.
If you ask friends if you should file for bankruptcy, their likely response will be “Only as a last resort!” The reality is more complicated than that – bankruptcy may be your best option to reach financial stability. Or the consequences, including the hit to your credit for years to come, may not be worth any gains you would make. Everyone’s situation is different.
The decision to file for bankruptcy isn’t a simple matter of weighing pros and cons, but rather a more complicated issue of understanding your finances now, and what you would like your future to be.
Things to consider are:
IS IT NECESSARY?
Filing a bankruptcy does not come without any consequences and there are risks involved with its filing. Because of this, it is recommended that you file a bankruptcy only when it is truly necessary.
The biggest risk is the fact that you are barred from filing another bankruptcy for a specified period of time. The time period between the filing of two Chapter 7s, for example, is 8 years from filing date to filing date. So you lose your safety net against any new collection actions for that time. For a period of 8 years, you will lose the ability to stop any garnishments of your check, prevent the shut off of your utilities, and prevent and/or end the suspension of your license caused by a non DUI accident. Therefore, the longer you wait to file, the bigger impact your eventual bankruptcy (if needed) will have.
The other factor to consider is the effect of bankruptcy on your credit history. It makes logical sense to file a bankruptcy if you have impossible debt, because your credit score is already taking a beating. Not so much if you can handle the debt and keep your score up, because the filing of a bankruptcy can put you in a position that makes it difficult to get future credit for a period of time, or, if you can get credit, with unforgiving interest rates.
If you are considering a bankruptcy, it is important that you talk to an attorney about whether it is the right choice for you and what effect it would have on your property and future.
WILL I LOSE MY HOME?
Generally, not under Chapter 13. Under Chapter 7, it depends on how much equity you have in house. If you have a lot of equity in it, the trustee could choose to have it sold to pay off creditors.
When you file a bankruptcy petition, you have the opportunity to “exempt” certain property. The type and amount of exemption available varies from state to state. This means you can normally protect a certain percentage of the equity in your house and other property. The federal maximum is usually $25,150 – double that if you are married, your house is jointly owned with your spouse, and you file the bankruptcy jointly with your spouse. Though you may have the option to file bankruptcy without your spouse.
If you have less than that amount in equity, the court-appointed trustee probably won’t sell your house since it won’t produce enough to pay off much debt. Though, your lender can still foreclose on the house if you miss your mortgage payments.
If you have more equity than you can exempt, the trustee likely will sell your house and you’ll receive the exemption amount on sale. For instance, if your house is sold for $200,000, and you were able to exempt for $25,150, you’d get $25,150 on sale and the rest will go to pay off your mortgage and other debts.
Other personal property that can be sold includes jewelry, antiques, appliances, furniture, books, musical instruments, almost anything of value. There are also exemptions for those items in most states.
At least they can’t sell your pet. Well, technically pets are property and can be sold. But unless your poodle is Westminster Dog Show quality worth thousands of dollars, it’s unheard of for a trustee to try to sell that or any other critter.
How Long Will It Take for My Credit Score to Rebound?
The exact numbers vary, but it really depends on your starting point. A good credit score (700 or higher) will likely drop more than 200 points. A lower score will drop between 130 and 150 points. Just about everybody who files for bankruptcy ends up with a credit score somewhere south of 600, some of them way south.
This can mean paying much higher interest rates on loans or advances, assuming you’d even qualify for them.
A Chapter 7 bankruptcy stays on your credit report for 10 years. A Chapter 13 stays on for seven years, but you can rebuild your credit over time by managing your debt smartly.
The best place to start is by making on-time payments and bringing past due accounts up to date. That is the biggest factor in your credit score.
The impact of bankruptcy lessens over time because some of your debt is reduced or discharged. That reduces your credit utilization ratio, which determines 30% of your credit score. FICO estimates it takes about five years for a score that was 680 to fully recover from a bankruptcy filing.
SO What’s the Better Option – Chapter 13 or Chapter 7?
That all depends on your particular situation. Obviously, the ideal answer is neither, but sometimes bankruptcy is unavoidable in the wake of medical emergencies or job loss. If you want to be able to keep all of your property, Chapter 13 might be your best bet, but there are cons to Chapter 13 bankruptcy as well. Chapter 7 has harsher consequences, but it might not deliver the financial relief you need.
You can also try to come up with a viable budget and stick to it. If you need help, there are nonprofit credit counseling agencies and debt management programs to get you back on track. They might be able to reduce interest rates and monthly payments to a level you can afford. Credit counseling is actually mandated with most bankruptcies, so you might as well get the treatment before you file.
If you stick to the debt management plan, you might not have to file for bankruptcy at all. Then the fear and mystery around filing for bankruptcy will vanish before it ever begins.
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