Despite a 2005 law that made bankruptcy filing much harder and more expensive, the number of people requesting bankruptcy protection is surging. On average, nearly 5,000 filed each business day last month – up more than 30% from the year before.
But even if you have overwhelming debt, lost your job, or suffered a serious medical setback, the bankruptcy option may not be right for you. Before you make the decision, there are some things you must know, courtesy of John Ulzheimer.
You’ve got to know your chapters. Chapter 7 dissolves all of your debt that is legally dissolvable, meaning that you may walk out of the proceeding completely debt free.
Chapter 13, also known as a ‘wage earner plan,’ allows you to make payments each month that are distributed to your creditors. Normally, it takes 3-5 years to fully pay out a chapter 13 bankruptcy. (In both the above cases, the filing will remain on your credit report for 10 years.)
With any bankruptcy filing, you must be aware of the damage it will cause. Expect serious damage to your credit for at least a decade, Ulzheimer says. It tends to make sense if you are in so much debt that you won’t be able to pay it off even through a debt management plan in the next 3-5 years. Just make sure you recognize that you’ve just seriously damaged your credit and reset your expectations for the next several years – you will not qualify for large amounts of unsecured credit with a bankruptcy on your report. If you’re in the market for a house or car over the next 2-3 years, your rates will be through the roof. Your credit scores will be all but destroyed for at least two years. But credit bureaus love to see new, good information as soon as possible after a bankruptcy so start rebuilding credit as soon as you can.
If you file, Ulzheimer recommends jumping back in within a year by opening a secured credit card, so long as you can manage it responsibly. If you file chapter 7, your assets will probably be seized to pay off creditors (your house and car may be expections). Chapter 13 allows you to keep more of your belongings, and both options protect you from your creditors and collection agencies.