Your debt feels impossible. New bills and past due notices are showing up constantly. Creditors won’t stop calling. As you feel like throwing your hands in the air, you wonder – should I file for bankruptcy?
Due to the COVID-19 pandemic, this is a reality that many might be facing. Millions of Americans across the country have been unemployed since earlier this year. It’s incredibly easy to get behind on bills when the money isn’t coming in, but the bills are still showing up. It’s an overwhelming feeling.
The longer this pandemic continues, the more likely it is that you’ll see an attorney on a TV commercial asking if you’re thousands of dollars in debt, feeling overwhelmed by creditors and looking for a solution. Next – they’ll present the option of filing for bankruptcy, which who wouldn’t want to have their debt forgiven, right? Not so fast.
Filing bankruptcy might help you get rid of your debt, but it’s important to understand the serious, long-term effects it can have on your credit. When you file bankruptcy, it remains on your credit report for 7-10 years as a negative remark, and it affects your ability to open credit card accounts or get approved for loans with favorable rates.
What exactly is bankruptcy? Bankruptcy is a legal process designed to help individuals and businesses eliminate all or part of their debt, or in some cases – help them repay a portion of what they owe. There are several types of bankruptcy, but the most common types are Chapter 7, Chapter 11 and Chapter 13.
Chapter 7 forgives most of your debt and allows you to keep all of your assets with a few exceptions, depending on state and federal laws. During the process, you and your creditors are invited to a meeting where they are allowed to make a case as to why a federal bankruptcy court shouldn’t forgive your debt. Once your case is approved, your debt will be forgiven, and none of your creditors will be allowed to hassle you over the forgiven debt.
Chapter 11 is generally for small business owners. It allows small business owners to retain their business while paying back debts according to a structured plan. With this option, business owners give up a certain amount of control to court officials, debtors, or counselors assigned to help them rebuild their credit. Despite losing some control of the business, owners are able to keep their business running while working on their financial future.
Chapter 13 is different than Chapter 7 in that it requires you to come up with a plan to repay your creditors over a 3-5-year period. After that, your debt will be forgiven.
Things to consider if you’re thinking about filing bankruptcy:
It’s important to note the serious impact bankruptcy can have on your credit report. Bankruptcy effectively wipes out everything on your credit report – good and bad remarks, and will stay on your credit report for 7-10 years.
This also means any account you’ve paid off or left in good standing that could positively impact your credit score, is also wiped out. Any hard work you’ve put into building your credit is basically nonexistent once you file bankruptcy. All the negative remarks will be gone as well, but you will also be considered high-risk when it comes to lending moving forward.
Bankruptcy affects your ability to open lines of credit – credit cards, mortgages, auto loans, personal loans, etc. Because you will be labeled high-risk, most banks will likely deny any application you submit for a line of credit – even though your credit score might have gone up when your credit report was initially wiped out. If you are approved for a line of credit, you’ll likely get a much higher interest rate which will make your monthly payments higher too.
Should you file for bankruptcy?
When it feels like your debt is caving in on you, bankruptcy might seem like the only way to reach financial peace. Here are a few steps to consider taking before you consider filing.
- Take a moment to talk to your creditors. Negotiate and see if there are options to make your debt more manageable. Can you lower the interest rate? Is it possible to settle for less than you owe? Can you set up a payment plan?
- Talk to us about your financial picture. We might have options that will allow you to consolidate your debt into one, more affordable payment.
- Go through your house. Do you have things you don’t use or need that you can sell? If so, sell some of those items and apply that money to your debt.
Also, it’s important to note that not all debt is eligible for bankruptcy. While bankruptcy can eliminate a lot of your debt, some types of debt cannot be forgiven:
- Most student loan debt.
- Court-ordered alimony.
- Court-ordered child support.
- Reaffirmed debt.
- A federal tax lien for taxes owed to the U.S. government.
- Government fines or penalties.
- Court fines and penalties.
Bankruptcy should be the last option you consider. Look through your debt, see what you owe and carefully weigh all your options. Again, make an appointment to come in and talk to us and we can help you review your options. We’re your credit union, and we’re here for you!