Is Bankruptcy the Right Option?

by Sep 5, 2022Blog, Credit Consulting

Declaring bankruptcy is often considered a last resort that should be avoided if possible. That said, many people struggling with their debt may find the only substantial relief is to file for bankruptcy. Bankruptcy allows them to erase most of their debts and start from a fresh slate.

However, it is still a significant decision, and people should consider all their debt repayment options before filing for bankruptcy. Read on to learn more about determining if bankruptcy is the right choice for you.

Types of bankruptcy

There are two types of bankruptcy available to individuals, each with advantages and disadvantages.

  • Chapter 7 bankruptcy: Most, if not all, debt is canceled with a Chapter 7 bankruptcy. A trustee may sell your property to help pay off some of the debt before the rest is erased.
  • Chapter 13 bankruptcy: Instead of canceling debt, Chapter 13 bankruptcy creates a court-approved payment plan over the next 3-5 years. No liquidation of assets occurs as long as you keep up with the plan.

Alternatives to bankruptcy

When someone is overburdened with debt, bankruptcy seems like the easiest way to get out of debt. However, not all debt goes away with bankruptcy. Student loans are notoriously difficult to erase. Other debts like child support or taxes are also not eligible for bankruptcy. You may also be denied a Chapter 7 bankruptcy if you make enough money to pay off your debts in a Chapter 13 filing.

You may want to begin your financial journey by consulting with credit experts first. At Improve Credit, our experienced counselors can analyze your current financial situation and create a personalized plan to tackle your debt. Our credit repair services are more than budgeting—we also provide debt management plans to ensure you can rebuild your credit.

Repairing your credit takes time and effort, but it can save you from having to file for bankruptcy. This means you are more likely to be eligible for better credit in the future.

Questions to ask yourself

Before contacting bankruptcy lawyers, ask yourself if you’ve taken the right actions to manage your debt.

  • Have you tried other bankruptcy alternatives? Be sure to consult with the right people to help manage your debt. Meeting with a credit counselor is a requirement before you can file for bankruptcy.
  • What debt doesn’t get canceled? If you find student loans are causing a financial burden, there’s a strong possibility bankruptcy won’t get it canceled. On the other hand, significant credit card debt may qualify.
  • What’s going to happen to your home? Depending on local exemption laws, bankruptcy could claim the equity in your home. A Chapter 13 bankruptcy filing may help you manage your debt with a payment plan if you owe mortgage arrears.
  • What about your other assets? Property like cars could also be claimed and sold to settle debt during bankruptcy.
  • What about your co-signers? If you took out a loan with a co-signer, they could be held liable for the loan in Chapter 7 bankruptcy. A Chapter 13 bankruptcy could save them from paying the debt.

Once you consider all the factors of how bankruptcy could affect you, you can make an informed decision on what is the best course of action.

How does bankruptcy affect credit?

Bankruptcy stays on your credit report and may make it more difficult to obtain loans in the future. A Chapter 7 bankruptcy can last on your credit report for up to 10 years, while a Chapter 13 bankruptcy will stay on your credit report for up to 7 years.

The good news is that you will eventually be able to gain new lines of credit even with a bankruptcy on your credit report. If you use the credit properly, you could slowly gain a good credit score.

How long does it take to rebuild your credit after bankruptcy?

Bankruptcy is the single worst event to happen to your credit. But once it happens, you can work toward getting a better credit score. As long as you don’t get yourself back into serious debt again, you may start to see improvements after a couple of years.

Bankruptcy can take a long time to recover from, so people should consider it with care if they truly can’t find ways to pay off their debts within a reasonable time frame. If you need to take care of your debts, credit counseling can help you clearly see your options. At Improve Credit, we provide personalized debt management plans to help you increase your credit score month by month. Get in touch with us for a free analysis.