There’s no question that Americans are heavily in debt. The average American household owes more than $15,000 on credit cards, $156,000-plus in mortgage debt, and nearly $33,000 in student loan debt.
When you’re struggling with that much debt — or even more — you might ask yourself: Should you file for bankruptcy to get fast, easy relief? Before you make that decision, however, you should be aware of the types of bankruptcy, the process for filing and settling bankruptcy cases, and the ultimate consequences of bankruptcy.
Federal law provides for three types of bankruptcy cases: Chapter 7, Chapter 11, and Chapter 13. Before you can file for any type of bankruptcy, you’ll have to sit down with an approved credit counselor to see if there’s any better way to manage your debt and to ensure you understand the consequences of bankruptcy. In order to file for bankruptcy, you’ll have to have a certificate that says you did this. After you file, you’ll have to complete a debtor education course and submit proof to the courts.
Chapter 7 bankruptcy is the most common type of bankruptcy, and it’s also called “straight bankruptcy.” Should you file for bankruptcy under Chapter 7 of the code, you’ll be required to sell off your property — although you may get to keep some things, such as your car — in order to pay as much of your debt as you can. Leftover debt is then discharged and you no longer owe it. However, once you’ve gotten debt relief under Chapter 7, you can’t file for it again for eight years.
Chapter 11 bankruptcy is mostly used by businesses, although individuals can also file for this type of bankruptcy. It’s commonly referred to as a reorganization. This type of filing allows businesses to “go bankrupt” and still remain in business. Basically, a trustee takes over the debtor’s business and restructures things in such a way as to make the business solvent again.
Chapter 13 bankruptcy allows you to keep certain property, such as a home with a mortgage or your car. In exchange, you have to agree to a repayment plan that pays off your debts over three to five years. You must have a steady income and make all the payments under the plan. Once you’ve done that, your debt will be discharged. Should you file for bankruptcy again under Chapter 13, you’ll have to wait two years to file for it again.
The consequences of bankruptcy are significant, no matter what kind you file. Bankruptcy is the worst thing that can happen to your credit, and it can affect virtually every aspect of your life, including your ability to secure future credit at favorable rates, how much you pay for insurance, whether you can qualify for an apartment rental, and even your employment prospects. Chapter 7 bankruptcies stay on your credit report for 10 years, and Chapter 13 for seven years.
Should you file for bankruptcy? Only you can decide that for yourself, but before you do, it pays to know what you’re getting into, what bankruptcy does, and what it doesn’t do. Bankruptcy is not a “get out of jail free” card. In order to recover from the consequences of bankruptcy, you’ll need to take measures to adopt good credit and money management habits so you can ensure you never have to file for it again.
For more resources, check out some of our other blog posts:
- Financial Health Check Tips for Every Age
- 10 Important Facts About Debt
- 5 Free Budgeting Tools To Save More Money
- How To Build Your Net Worth Like A Boss