When under a heavy debt load many people turn to bankruptcy to resolve their financial problems. In some instances this is their only option but for many Americans with outstanding credit card debt Bankruptcy is not a necessity.
Generally, most people consider personal bankruptcy a last ditch effort reserved for people who are out of options. It can stop a wage garnishment, halt foreclosure proceedings and end collections calls. While effective there are several long-term consequences that most consumers should avoid.
Bankruptcy will negatively impact your credit for 7 to 10 years. It can also keep you from obtaining credit in the future, such as auto loans, student loans and mortgages. In some instances it could even prevent you from applying for or accepting certain jobs.
While we cannot give you legal advice or recommend whether or not to file bankruptcy we do know that not everyone can file for Chapter 7, which is what most people think of when they discuss bankruptcy. When filing Chapter 7 your qualified debt is legally discharged (exemptions include student loans, child support, income tax etc). However with recent changes to bankruptcy laws many working class Americans do not qualify for Chapter 7 and instead have to file Chapter 13.
Chapter 13, also known as re-organization, puts you on a 3 to 5 year re-payment plan that the court determines for you based on a “means test”. This test uses the average income and the average expenses for the area you live in to determine how much you can afford to pay to your creditors. Instead of looking at your actual financial situation they use a government test to look at how much money you should have left over every month and then dictate how much you will pay.
Bankruptcy is also costly. When filing bankruptcy you have to hire an attorney and pay court costs. It can easily add up to a few thousand dollars just to get started.
When you add up the costs associated with filing, the long-term damage to your credit and the inflexibility of the process anyone can see why bankruptcy is such a big decision.
There are other solutions what will do less, long-term harm to your credit and get you out of debt on a payment that you determine.