What Bankruptcy Really Means
Bankruptcy is usually “the option of last resort” for people in a financial crisis. Financial advisors, credit counselors, or even bankruptcy attorneys counsel clients to explore other alternatives before turning to bankruptcy. Bankruptcy alternatives include credit counseling and debt consolidation. Advisors also suggest the best time to explore these options is at the early stages of a credit crunch – before your credit history takes a big hit.
But bankruptcy isn’t the end of the world either. If you face bankruptcy or have a bankruptcy in your past, there are lenders who may still want to help serve you.
Bankruptcy defined
The majority of bankruptcy cases fall into 3 categories – Chapter 7, Chapter 11 or . Personal bankruptcy means different things, depending on what type of bankruptcy you file:
- Chapter 7 Bankruptcy – Debt liquidation
- Allows borrowers to walk away from most debts and keep some assets.
- To qualify for this option, the bankruptcy candidate’s income must be less than the State’s median.
- Chapter 11 or 13 Bankruptcy – Debt reorganization
- Allows people to restructure their debt
- Some lenders are repaid in full, others in full but without interest, and others are only partially repaid.
Bankruptcy’s downside
Bankruptcy itself is costly and complicated. When the rules changed in October 2005, the cost of both Chapter 7 and Chapter 13 bankruptcy rose substantially.
What are some of the downsides of bankruptcy?
- Bankruptcies are “bad marks” that can affect applications for employment, rental leases and insurance.
- Bankruptcies stay on consumer credit reports seven to ten years-making it harder to get loans and much more expensive to borrow.
Bankruptcy in your past?
Nobody’s perfect. Once you’re on the other side of a bankruptcy, there will probably be some lenders out there offering credit repair options waiting to serve you. Remember, every on-time payment that you make shows lenders you honor your agreements – and helps increase the likelihood that they’ll be there for you the next time you need a loan.
