If you're having trouble paying your debts, you might be wondering if it's time to file for bankruptcy. A bankruptcy filing is essentially your legal statement to creditors that you are unable to pay back your loans. But what actually happens to your assets (such as your house, your stuff and your bank accounts) when you file for bankruptcy? You will still owe some money, and the temporary relief of filing for bankruptcy may not be worth the financial consequences to you.
Types of bankruptcy
The first thing to understand is that there are several different types of bankruptcy. Of those, here are the three types that may be an option for you as an individual:
- Chapter 7 bankruptcy. Called "straight bankruptcy," this is a common option for individuals. It means that your assets are liquidated although there may be some exemptions (for example, you may keep your personal home but not other property). Most debts are forgiven, although there are exceptions (such as liens, school loans and child support).
- Chapter 11 bankruptcy. This is typically for corporations but is an option for individuals who have significant assets.
- Chapter 13 bankruptcy. This method of bankruptcy reorganizes your debts into a plan that is easier for you to repay. It is preferable to Chapter 7 bankruptcy in some ways: you may get certain debts discharged and you can stop a home foreclosure with this type of bankruptcy.
After filing for bankruptcy
The type of bankruptcy that you file determines the specific effects that you'll experience. However, the general effects of filing for bankruptcy include:
- Your credit score immediately drops. Bankruptcy shows up on your credit report for up to ten years after you file. This can make it difficult to get credit cards, secure a new home loan or qualify for personal loans. However, if you maintain good credit habits, you can re-establish good credit in as little as four years despite the fact that the bankruptcy remains on file.
- You will receive credit card offers. Immediately after filing for bankruptcy your mailbox will fill up with bad credit card offers from lenders who want to lure you into new debt. Make sure to ignore these offers.
- Some of your debts are forgiven, but many of them aren't. The important thing to understand is that you will experience relief from some of your debts but not all debts are erased. You typically need to repay a large percentage of your debts even after filing for bankruptcy. If you can find another form of debt consolidation then that is preferable to filing for bankruptcy.
- There will be fees to file and fees for legal representation, possibly amounting to several thousand dollars.
Have you ever had to consider filing for bankruptcy? What did you end up doing and why?