When you’re struggling financially, bankruptcy may seem like a good option. It can give you the chance to start from scratch, but you should know that it will ruin your credit for a long time. Before making this important decision, you should weigh all of your options carefully.
Bankruptcy can eliminate some of your debt, but it can also wreak havoc on your credit rating. A bankruptcy will show up on your credit report for seven years. During this time, you will have a very low credit raing, which means that you may be unable to get a loan, an apartment or a car. When you are able to get financing, it is typically at much higher interest rates than you may have had in the past. Additionally, debt isn’t always eliminated in a bankruptcy, meaning that you could ruin your credit and still be responsible for payments.
In a Chapter 7 bankruptcy, you will discharge all of your debts. However your creditors will take all of your assets, including your home, your car and anything else of value and sell it off in order to cover some of the cost of your debt. In a Chapter 13 bankruptcy, you get to keep some of these assets, but you must still make payments toward them as ordered by the court.
In both types of bankruptcies, the bankruptcy will show up on your credit report for seven years. After that, it will still take more time to build up a good credit rating. The payments on a Chapter 13 bankruptcy will last three to five years, depending on the court stipulations.
Bankruptcy can be a good option when you cannot pay off your debts in a reasonable time frame–if you are struggling to pay for the basic necessities and don’t have much left over to apply for debt. Once you start the process, creditors can no longer contact you, which can help decrease your stress levels. In a Chapter 13 bankruptcy, you’ll only have to pay one bill rather than several creditors.
Because of the long-lasting effects of bankruptcy, it’s best to use it only as a last resort. If you are struggling to keep up your debt, a visit with a nonprofit credit-counseling agency may be able to get you back on track, as can a consolidation loan. You may also find that by downsizing your lifestyle and adopting more frugal behaviors, you can more easily chip away at your debt and avoid bankruptcy.
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