Going Bankrupt
Bankruptcy laws allow people to start over with a clean slate. If you simply can't pay your debts, you may consider filing for bankruptcy. Bankruptcy can get you a lifeline, but it's not always the best thing to do for your credit.
How Bankruptcy Works
When you file for bankruptcy, the courts keep your creditors at bay. After taking an inventory of your assets and your ability to pay, you figure out what type of bankruptcy is best. The courts might require that you liquidate certain assets, pay off as much as you can, and then free you from paying what's leftover. Or, the courts might set up a process where you pay off what you can over several years. In any case, you get to start over from scratch — at a cost.
As you investigate bankruptcy, be sure to talk with qualified counselors. Don't make the decision on your own, and consider the motivations of anybody who offers you advice. A good place to start counseling is Consumer Credit Counseling Services. This organization has offices throughout the United States.
How Bankruptcy Hurts You
Bankruptcy appears in your credit reports for seven to ten years. As you might imagine, this is not an item that lenders look favorably upon. A past bankruptcy tells them that you defaulted on some type of debt, from another lender just like them. The cause of your bankruptcy will not earn you much sympathy. If you have a bankruptcy on your report, lenders will worry about you.
With bankruptcy items on your credit reports, you won't have access to the best deals out there. Lenders may deny your applications, or they may offer you a loan with unfavorable terms, like a higher interest rate or lower spending limit. While you may be able to get a mortgage, you'll pay a lot more in interest because of that higher rate. Overall, declaring bankruptcy will cost you for years to come.
Before You File for Bankruptcy
A lot of folks end up in a situation where bankruptcy is the only viable option. If you need to file for bankruptcy, then you need to file. However, you should consider the alternatives if any exist. Filing for bankruptcy is irreversible — even if you change your mind and decide not to go through with it, your records will show the bankruptcy for seven to ten years.
The best thing you can do before filing bankruptcy is try to work things out with your creditors. They really don't want you to go through bankruptcy and have their debt discharged. Let them know that you've fallen on hard times and that you really want to pay off the debts.
You should ask for more time to pay, a lower interest rate, forgiveness on some of the debt, and so on. It never hurts to ask; the worst they can do is say no. Try to negotiate a settlement amount that will make them happy and make them leave you alone. A settled debt will look better on your credit reports than a bankruptcy.
Keep in mind that bankruptcy won't help you with every type of debt. For example, tax debts and a few other types of debt will not be discharged. As you decide whether or not bankruptcy makes sense, be sure you understand which debts will not be affected by a bankruptcy. If the majority of your debt cannot be discharged, bankruptcy is a bad idea.
