Sometimes it doesn't matter how hard you work - you just can't make ends meet. Debts can accumulate faster than you are able to pay them off and there are certain necessary expenses (like rent, utilities, and groceries) that simply cannot be avoided. If you feel like you are at the end of your rope and you have no other option, filing for bankruptcy could be your best choice.

What Exactly is Bankruptcy?

Before you seriously consider filing for bankruptcy, you should take the time to learn what it is and how it works. There are two different types of bankruptcy - Chapter 7 and Chapter 13. The term bankruptcy itself refers to a federal court procedure which allows you to get rid of your debts and to repay your creditors.

Depending which type of bankruptcy you file for, different things may happen. For example, if you file for Chapter 7 bankruptcy, some of your property could be seized and sold to pay off debts - things like furniture, clothing, and cars cannot be seized under Chapter 7 bankruptcy. This type of bankruptcy also wipes out unsecured debts - debts that are not secured with collateral.

The second type of bankruptcy, Chapter 13, is sometimes called "wage earner" bankruptcy because it is intended for people who have a reliable source of income. With this type of bankruptcy you make an agreement with the federal court system to create and follow a repayment plan and to stick it out over the next three to five years.

Your payments will be determined by your income and your amount of debt. This type of bankruptcy allows you to keep your property while repaying secured debts. There are many benefits to this type of bankruptcy but it will stay on your credit score for seven years.

The Pros and Cons of Filing for Bankruptcy

Making the decision to declare bankruptcy is by no means an easy one. Depending which type you file for, you may still be required to make monthly payments or you could lose a significant amount of your property. To determine whether bankruptcy really is the right choice for you, consider some of the pros and cons. Here are some of the downsides of bankruptcy filing:
  • Filing for bankruptcy can ruin your credit score, making it more difficult for you to obtain credit in the future (can stay on your credit report for up to 10 years).
  • You may lose property you own if it is not exempt from sale - this could include luxury possessions.
  • You will lose all of your credit cards and it will be very difficult to obtain a loan in the future - especially something like a mortgage.
  • You cannot file for bankruptcy a second time within six years - if your financial situation gets worse after filing you could be stuck.
  • Filing for bankruptcy does not relieve you of child support or alimony payment obligations - nor will it erase student loan debt.
Though there are many downsides to bankruptcy, it could still be your best option in certain cases. Below you will find a list of pros for bankruptcy:
  • Filing for bankruptcy will stop collection actions including wage garnishments, repossessions, and foreclosures.
  • In most states, individuals filing for bankruptcy are still allowed to keep their car, home, and other essentials.
  • If you have a lot of credit card debt and your creditors have become aggressive about collection, filing for bankruptcy will put that to an end.
  • You will be allowed to keep the wages you earn and any property you purchase after filing for Chapter 7 bankruptcy.
Deciding to file for bankruptcy is not an easy choice and while it may provide some short-term relief, there are many long-term consequences you need to consider. If you are thinking about filing for bankruptcy take the time to do your own research to determine whether or not it is really the best option.

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