Can Filing Bankruptcy Help or Hurt You?
Declaring yourself insolvent by filing for bankruptcy has the potential to both hurt and help you. Although filing a bankruptcy petition provides you instant relief from creditors until your court hearing, the future ramifications of your decision can negatively impact your ability to qualify for credit in the future.
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Types
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If you earn less than the average household of the same size in your county, you qualify for Chapter 7 bankruptcy. Through Chapter 7 bankruptcy, the court will seize your assets, sell them, and pay off as many of your debts as possible. Because Chapter 7 filers typically possess few assets, Chapter 7 often results in the court eliminating your debts.
If you earn more than the average household in your county, you must file Chapter 13 bankruptcy. Through Chapter 13, you must present a payment plan to the court. A three- to five-year mandatory repayment period requires you to pay off as much of your debt as your current income allows.
Benefits
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While Chapter 7 bankruptcy often terminates your liability for the majority of your debt, Chapter 13 also discharges certain debts. If you adhered to your repayment plan, yet were unable to pay off your debts in their entirety, the court will discharge the remainder that you owe when it discharges your bankruptcy. A bankruptcy's automatic stay also prohibits creditors from contacting you, granting you relief from collection calls and letters.
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Disadvantages
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Filing for Chapter 7 bankruptcy could cost you your home or car, depending on your state's exemptions and the value of your assets. In addition, the bankruptcy will appear on your credit report regardless of which chapter you file under. The bankruptcy notation counts against you and damages your credit rating considerably. The Fair Credit Reporting Act notes that a bankruptcy can appear on your credit report for up to 10 years.
Warning
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In some cases, filing for bankruptcy can hurt you more than leaving debts unpaid. Creditors to whom you owe unsecured debts, such as collection accounts and credit card debts, must follow your state's statute of limitations when suing you for payment. Once the statute of limitations expires, the creditor cannot take legal action to recover the debt, and its report to the credit bureaus is only valid for seven years. By contrast, a bankruptcy can appear for 10 years and could cost you your assets.
Considerations
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If you file for Chapter 13 bankruptcy and change your mind later, you can have the bankruptcy voluntarily dismissed. Although some courts will dismiss a Chapter 7 bankruptcy at the debtor's request, not all are willing to do so. Consider the pros and cons of a Chapter 7 bankruptcy carefully before filing, as you may not be able to have it dismissed.
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