I would always counsel Frugal Living and Debt Reduction before filing bankruptcy, but what if you really don’t have any choice? While filing for bankruptcy can really decimate your good credit for a long time, it can also give you the breathing space that you need to start over, to rebuild a healthy financial future as you learn to live at or below your means.
There are two forms of bankruptcy that are open to you: Chapter 7 and Chapter 13. While you should talk to a lawyer to find out if either of these options are best for you, you can use this basic guide and do your research ahead of time.
With both forms of bankruptcy, you will still be responsible for paying secured debt, such as student loans, taxes, child support and house payments. You will also need to attend court hearings and file a lot of paperwork.
What is the Difference?
The basic difference between filing Chapter 7 and filing Chapter 13 comes down to how your debt is handled. Chapter 7 dissolves most of your debt (there are some exceptions), while with Chapter 13, you pay off your debt over time.
Pretty much anyone can file bankruptcy, although you should view this as a last resort. To qualify for Chapter 7, your income must be below the state’s average income.
Pros and Cons of Chapter 7
- Unsecured debt is discharged
- May have to sell your home and your car
- Creditors stop trying to collect your debt
Pros and Cons of Chapter 13
- Protects your home
- Stops additional penalties and interest on your debt, as you pay it off
- Must undergo credit counseling
- Can become debt free in 3-5 years
- Severe penalties if you default on your payments, but your plan can be restructured if you lose your job or have a change in income.