Bankruptcy Basics

Bankruptcy is a legal process where a debtor is declared insolvent. It is designed as a last resort for financially distressed individuals who no longer have the ability to pay the debts they owe. It provides an opportunity to start over again.

Impact on your credit score

Bankruptcy will put a noticeable "black eye" on your credit report. Most people who qualify for bankruptcy already have suffered the bulk of the damage to their credit score. Severe delinquencies and accounts well over the credit limit are negative factors that have already been included into your credit score calculation.

Having a bankruptcy record on your credit report does not mean that you are no longer able to receive credit. It does however mean that you will pay dearly for any credit that is extended to you. A simple car loan could carry an interest rate of 16 percent or higher, costing you thousands more.

Another consideration is the length of time that bankruptcy remains on your credit record. Unlike most records that expire after 7 years, bankruptcy is listed for 10 years.

When is bankruptcy the best option?

Bankruptcy is generally not recommended as an easy way out. On the other hand, if you clearly cannot pay a sizable amount of debt, then it may be something you should consider. Filing for bankruptcy protection can provide an automatic stay from foreclosures, repossessions and some other legal actions. Bankruptcy can provide temporary protection to allow you to maintain possession of assets until the court decides how to proceed. Courts frequently allow you to retain collateral assets (home and car) if you can prove that you can pay for the items over time.

Types of bankruptcy filings

Personal bankruptcy is normally filed under either Chapter 7 or Chapter 13 of the US Bankruptcy Code. Chapter 7, known as liquidation, refers to the process of selling non-exempt assets to help partially satisfy creditor obligations. Visa USA offers a Chapter 7 Resource Guide if you need more information. Chapter 13, commonly referred to as reorganization, allows you to set up a payment plan over 3 years to a court appointed trustee who then forwards payments to the creditors. The court may also grant up to 5 years to catch up on late payments owed on secured debts.

Benefits of bankruptcy

If you are unable to eliminate credit card debt and other obligations on your own, you may be able to do so quickly through bankruptcy. Bankruptcy can halt the foreclosure or repossession process, allowing you more time to catch up on payments. Utility providers will be prevented from disconnecting your services. Once your debts have been discharged, you no longer have a legal responsibility to pay them. You may have the opportunity to lower your payment on a secured debt. In addition, you can get a reprieve from wage garnishment and collection activities.

Limitations

Student loans, child support, alimony and many taxes are not eligible for discharge through bankruptcy. You will have to continue making these payments. Your secured assets can only be retained if you can actually pay for them. The court will decide if you can reasonably repay those debts. If a debt has a cosigner, the cosigner will still be liable for that debt.

Legal assistance

This summary of bankruptcy is for informational purposes only. If you are contemplating bankruptcy, you should find out more information before making a decision. A qualified bankruptcy attorney can assist you through what can be a very complicated legal process. If you need help finding an attorney, contact your state's bar association. You may also wish to try the following resource:

Legal Services Corporation
(800) 532-1275
3333 K Street NW, Third Floor
Washington, DC 20007

State offices of the Legal Services Corporation can assist you best.

The Legal Services Corporation (LSC) is a private, nonprofit corporation established by Congress to seek to ensure equal access to justice under the law for all Americans by providing civil legal assistance to those who otherwise would be unable to afford it. It provides grants to independent local programs selected through a system of competition. In 2002, LSC funded 179 local programs. Together they serve every county and congressional district in the nation.

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