Understanding Bankruptcy and the Alternatives

Posted on January 2, 2007

When you are in very serious debt, filing for bankruptcy may seem like the only option, however it's difficult to recover from negative ratings that filing for bankruptcy puts on your credit report. The two different types are Chapter 13 and 7. Chapter 7 is when all your assets, even those paid off, are given to the courts to pay off portions of your debt. Chapter 13 rids you of debt with a court approved plan to repay the money. It's usually a 3 to 5 year period that lets you repay your debts in a timely manner, you get to keep your personal property and pay what you can afford.

The bankruptcy will stay on your credit report for 7 to 10 years, you lose all of your assets and a percentage of your wages will be paid for creditors for 3 years. If you file it will be difficult to obtain credit again or buy a home and if you're approved for a loan again the interest rates will be abnormally high. If you ever start a business or are claiming bankruptcy for one, there are certain positions, such as director, you are not able to hold and you're required to explain to whomever you're in business with why you filed.

Alternatives to filing bankruptcy are seeking a credit counselor or debt consolidator. If you plan to take your own course of action, contact your creditors and try to work out payment arrangements, many creditors would rather help you this way than have you file for bankruptcy. Try to sell assets of value, the loss of personal items may not seem worth it, but in the long run, if it'll help you stay out of bankruptcy it definitely is.

In addition, consider refinancing your home or taking out a home equity loan mortgage. Both of these options possibly allow you to obtain money that would help pay debt. Filing bankruptcy is a serious and important decision, so make sure to seek help from professionals if you do not have background in financial management.

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