There are many factors that can affect your finances. From a job loss to a prolonged disability, unexpected events of all kinds can have a profound impact on your finances. For many people who find themselves mired in debt, the idea of filing for bankruptcy can feel like a welcome sigh of relief. While bankruptcy may be the answer in certain situations, it shouldn't be considered an easy way to handle your debt.
Bankruptcy isn't something that should be taken lightly. However, if your individual situation has come to the point where filing for bankruptcy is best, then be certain that you understand what your options are.
The two most common consumer filings
The two most common types of bankruptcy filed by individuals are Chapter 7 and Chapter 13. The main difference between the two is that with a Chapter 7, most all of your debts are wiped out, whereas a Chapter 13 filing allows you to pay your creditors back on an arranged payment plan.
Chapter 7 bankruptcy
With Chapter 7, most of your debt will be discharged. Simply put, you will no longer be responsible for making payments to your creditors. However, there are certain financial obligations that are typically excluded under a Chapter 7 filing such as alimony, child support, and federally funded student loans, just to name a few. Consult with a bankruptcy attorney who can provide you with specific exclusions in your state.
Chapter 13 bankruptcy
With Chapter 13, you are placed on a mandatory repayment plan. Learning to budget on this type of repayment plan shouldn't be too difficult to manage because it's generally based on your income and how much you can afford to pay each month. In addition, you may be able to have some of your debts reduced, making it easier to pay down your debt.
The impact on your credit
Whether you file Chapter 7 or 13, a bankruptcy doesn't disappear once your creditors are paid. In fact, a bankruptcy can remain on your credit report for up to 10 years, impacting everything from your ability to qualify for loans to how much you'll pay in interest rates. For these and many other reasons, a bankruptcy should only be considered as a last resort.
The decision to file for bankruptcy is a serious one. However, for some it can offer a clean financial start when there simply isn't another solution. If you must file bankruptcy, consider working with a financial advisor afterwards. A professional can help you learn to budget by working out a plan to better manage your finances, as well as suggest insurance products such as disability and credit life insurance to protect your assets and avoid similar situations in the future.