Bankruptcy can be a solution to your debt problems, but it should be a last resort after you have tried every other options. If you do wind up filing for bankruptcy protection, keep in mind that it is not an easy solution. You can bump up against a number of hurdles, such as federal estate tax law and laws regarding foreclosure. Here are some of things you should consider before looking at bankruptcy as an option.
One of the main bankruptcy issues you are going to encounter is what type of bankruptcy you are going to file. Your two main choices are Chapter 7 and Chapter 13. Chapter 7 involves liquidating most of your assets to pay off your creditors. In a Chapter 13 bankruptcy case, you are allowed to reorganize your debts to get more favorable terms to pay them off over time. The type you will qualify for will depend on a number of factors.
Another consideration when thinking about bankruptcy is what it will do to your credit score. If you have already been struggling with your finances and have fallen behind on payments, your credit score may already have taken a large hit, so filing for bankruptcy may not have that big of an effect. On the other hand, if you have worked to stay on top of your finances, or if your financial problems come on suddenly, such as from a catastrophic medical episode, then a bankruptcy filing could seriously hurt your score. And if you don’t think such a thing can happen to you, keep in mind that medical expenses are the cause of 62% of all personal bankruptcies.
One final consideration to take into account when considering bankruptcy is whether you have exhausted all other options. Though more than 3,400 personal bankruptcy cases filed every day on average, there are many cases where people can avoid bankruptcy. Doing debt consolidation or going through credit counseling can help you get on top of your finances and avoid the need for a bankruptcy filing.
Once you do file for bankruptcy, you have to make sure you are honest about changes in your finances. For example, if you were to inherit money after filing for bankruptcy, federal estate tax laws require you to report that income. Concealing income or assets in a bankruptcy can lead you to face criminal charges.