Bankruptcy is definitely a viable option for certain individuals that have experienced an extreme hardship. However, no financial expert will ever suggest bankruptcy as a first option. It may seem like an easy way out but there are consequences that may not make it worth it.
There are 2 major types of bankruptcy that applies to consumer debt:
Chapter 7 – or “liquidation” or “straight bankruptcy” involves the liquidation of most of the debtors unsecured debt. A trustee appointed by the court gathers and sells your nonexempt property. The proceeds from the sale pay your creditors. You’re able to keep any “exempt” property.
Chapter 13 – or “personal reorganization bankruptcy” Involves a court appointed trustee to organize a repayment plan that sets forth with specificity the manner in which debtors will settle their debts or pay off in full over three to five years.
Both Chapter 7 and Chapter 13 bankruptcy represent a severe negative impact on your credit for 7-10 years. Even filing for bankruptcy can be costly as a typical filing can cost up to $2,500. Filing for bankruptcy could affect your employment status or ability to get hired.
- May have a negative impact on your employment status or future employment.
- In a Chapter 13 filing, you may end up paying 75 – 100% of your debt back.
- Chapter 7 is much more difficult to qualify for under the new bankruptcy laws.
- May result in higher interest rates on future loans.
- Carries a negative stigma, mental stress, and other burdens.
- Bankruptcy is a “last resort”.
- Chapter 13 completion rates average only 32%.
NOTE: Anyone considering bankruptcy as a debt relief option should contact a Bankruptcy Attorney.