The original idea of personal bankruptcy was a way to give consumers an opportunity to get rid of debts that happened as a result of bad luck. For example, someone was living frugally, paying bills regularly and something tragic happened such as drastic medical needs or unemployment. Personal bankruptcy was created to give these people a legal recourse to liquidate those debts. These are the reasons for the majority of personal bankruptcy cases today, but also creditors feel burned by other irresponsible consumers who overspend and end up not paying their debts.
Personal bankruptcy is an opportunity for you as a consumer to charge off or choose which personal debts to pay. Personal bankruptcy does not cover any business or commercial loans, corporate credit cards, etc. You may file for personal bankruptcy under either chapter 13 or chapter 7 bankruptcy. Businesses file for bankruptcy under chapter 11.
Chapter 7 personal bankruptcy is a liquidation of your assets, and is more “thorough.” Chapter 7 leaves creditors out in the cold more than chapter 13, as most of them are required to simply forgive the debts. If the debts are collateralized, though, they have the recourse to collect the collateral. Chapter 13 personal bankruptcy gives you the chance choose which debts you will repay and which debts you will have cleared. If you have chapter 13 bankruptcy on your record, it is not looked upon as negatively as chapter 7, because you at least pay back some of your creditors.
Contrary to what you may hear, personal bankruptcy does not “wipe your slate clean.” It will remain on your credit report for approximately 10 years. This can be a negative sign when applying for credit or housing in the future.
Granted, personal bankruptcy does eliminate many or all of your debts, depending on the type of personal bankruptcy for which you file. But ask yourself, “Do I want to trade the absence of these debts for the presence of BANKRUPTCY on my credit report?” Sometimes, the trade-off is necessary. Sometimes, you choose other options.
Remember, personal bankruptcy is not a “quick fix.” Be prepared for a long road. As with any legal process, personal bankruptcy requires motion filing, waiting, sometimes even contests, and long judgments.
Also, when you go through personal bankruptcy you will have at least one last bill to pay: the attorney’s. Depending on your attorney, you could end up paying $100 to $300 per hour for his or her services on top of court costs and filing fees. One way to cut down attorney fees for personal bankruptcy: make sure you have all your financial records together before you go to the attorney. This helps them save time. Also, make sure you list every single one of your creditors at the first filing so you do not have to pay filing fees twice.
Although personal bankruptcy will remain on your credit report and is a negative, it may still be possible to get credit and loans, depending on the creditor and their opinion on the bankruptcy. Some will still extend credit to you with bankruptcy on your record, and others may be less likely.
By D. Blair Thompson
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