Bankruptcy is a legal course of action that a person can take if they believe they are not capable of paying off their debts. These cases go to specialized bankruptcy courts, where they evaluate your debts and your assets, potentially ruling to forgive all or a portion of your debts. They may also help you restructure your payment plans to make repayment more plausible.
For both the debtor and creditor, bankruptcy can have some benefits. Obviously, the benefit for the debtor is that they may not have to pay all or some of their loans. For the creditor, when the court decides on a restructured payment plan or partial payment, they at least know they will recuperate some of their losses.
However, there are long-term consequences of a bankruptcy for the debtor. It reflects on your credit report for up to ten years, decreasing your FICO score and making it difficult to acquire new loans or credit cards with reasonable interest rates.
3 Most Common Types of Bankruptcy
There are a few common types of bankruptcy: Chapter 7, Chapter 11, and Chapter 13. There are more than those three types of bankruptcy, but because those are the most common, we’ll focus on those.
What Is Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also sometimes referred to as liquidation. In the liquidation process, debtors sell any non-exempt assets and put the funds toward repayment of unsecured debts — such as credit cards, medical builds, and unsecured personal loans.
What Is Chapter 11 Bankruptcy
Chapter 11 bankruptcy is specifically for companies that cannot pay their debt but want to stay in business. Debt repayment continues under the supervision of the court, and, in return, the company can create a plan to increase its profitability.
What Is Chapter 13 Bankruptcy
Chapter 13 bankruptcy is for individuals who earn too much for Chapter 7 bankruptcy. Instead of wiping out debt, the debtor will have a repayment plan to help them pay off their debt in about three to five years. Unlike Chapter 7, the debtor gets to keep all their property.
Does Bankruptcy Forgive Student Loans?
After Filing Bankruptcy
Filing bankruptcy offers you a second chance with your finances, helping you to get back to a neutral point so that you can rebuild. However, Chapter 7 bankruptcy stays on your credit report for ten years and Chapter 13 bankruptcy stays on for seven.
While it’s on your credit report, you will likely have bad credit which affects everything from getting a new credit card to applying for an apartment to getting a new job. About 15% of employers pull credit on all candidates, and about 33% pull credit for some candidates.
It’s discouraging to see the hit to your credit score. However, if you’re considering bankruptcy, your credit score is likely already in a bad place. Filing for bankruptcy may be a good option because it can prevent the situation from declining even further. In some cases, you may be able to continue life as normal without selling property or closing down a business.
If you’re struggling to repay your debts, bankruptcy and a second chance it provides maybe your best option.