Bankruptcy & Debt Consolidation
Financial hardships happen to both individuals and businesses. When the situation becomes dire, consolidating debt or filing for bankruptcy become options that people are forced to consider. There are different kinds of bankruptcies, from ones that consolidate debt to others that wipe the slate clean. Declaring bankruptcy affects credit and will hinder your ability to get financing in the future.
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Chapter 7 Bankruptcy
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The United States Courts acknowledge that Chapter 7 bankruptcy has the primary purpose "to discharge certain debts to give an honest individual debtor a 'fresh start.' " This type of bankruptcy can only be declared by individuals and not corporations or partnerships. In a Chapter 7, debts are canceled, but the person filing must give up nonexempt property to pay creditors. Secured property can be kept if payments are current and made regularly.
Chapter 13 Bankruptcy
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As opposed to a Chapter 7 bankruptcy, wherein debts are wiped clean, a Chapter 13 serves to reorganize and consolidate debt and create a plan for paying it off. This bankruptcy enables someone to keep his car or home, which could otherwise be lost due to problems with falling behind in payments. Chapter 13 bankruptcy is typically more difficult to file than Chapter 7, which comes as a result of the complications that come from coordinating financial matters with all creditors.
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Credit Implications
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Declaring bankruptcy negatively affects credit scores. This can have an impact on being able to receive low interest rates or even secure a loan. The declaration of bankruptcy stays on a credit report for 10 years. As noted by LawHelp.org, someone considering making this move will likely have a sufficient amount of debt and bad credit. There are financers who will offer credit to individuals who have declared bankruptcy, but the interest rates will be higher than for someone who hasn't.
Debt Management
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Once someone has reached the point of needing to declare bankruptcy, it might be too late to take any other course of action. By taking proactive measures, though, it is possible to avoid the situation in the first place. One such action is paying bills on time and maintaining a positive credit score. Some people fall into a financial pitfall by missing payments and letting finances slide until they become a major problem. Another proactive action that can be taken is to contact creditors directly and try to work with them. There might be room to work together, but communication needs to happen first.
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