Bankruptcy
You may have heard about bankruptcy and believed it to be a last-ditch option for those who are so financially strapped that nothing else can save them from seeming financial ruin. In reality, bankruptcy is a legal option that allows those with overwhelming financial obligations to seek a fresh start and avoid being hounded by collection agencies and creditors indefinitely. Bankruptcy puts an end to the collection process that often becomes a nightmare for those in serious debt, giving them a chance to wipe their financial slate clean and start over, although with severely damaged credit.
There are many different types of bankruptcy filings as defined by the federal and state bankruptcy court system, but the two most commonly used for individuals dealing with personal debts are Chapter 7 and Chapter 13. They differ slightly, but both basically provide protection from creditors and collectors from almost all debts—excluding taxes, child support and alimony payments, student loans or drunk driving injury payments—by reorganizing and/or liquidating your assets (and in the case of Chapter 13, requiring you to pay back as much as you can afford over a five-year period).
However, there are consequences to declaring bankruptcy that can affect your financial future for years, so it is not a decision to be taken lightly and should be made only after careful thought and consultation with both legal and financial professionals.
While filing for bankruptcy may relieve you of many of your debts (excluding the ones listed above), it has a very negative effect on your credit history and credit score. A bankruptcy will remain on your credit report as a matter of public record for up to 10 years, and can lower your credit score by as much as 100 points. What does this mean for you? Future loans and credit cards will probably cost you more, because potential lenders will charge you more interest and fees based on your bankruptcy— they'll see you as a very risky investment. Your premiums may increase on your homeowners insurance and car insurance. It may be more difficult to find a job or rent an apartment, since potential employers and landlords can pull your credit report and see your bankruptcy filing. So while bankruptcy does provide significant relief from overwhelming debt, the costs associated with it are not to be taken lightly.
