Personal Bankruptcy Types
- Filing for bankruptcy is a major decision. According to a report in "Kiplinger's Personal Finance" magazine, a bankruptcy can stay on your credit report for seven to 10 years and knock about 100 points off of your credit score. If you are overwhelmed with debt and can find no other way out, there are two types of personal bankruptcy to consider: Chapter 7 and Chapter 13.
- Under Chapter 7 bankruptcy you can have all of your debts, excluding child support, back taxes and student loans, eliminated. The process is not automatic, nor does it happen overnight. First you must qualify. This is determined by a means test. According to Kiplinger's Associate Editor Laura Cohn, you must "earn less than the median income for a family of similar size in your state." Prior to filing, you must consult with a U.S. Department of Justice-approved credit counselor. Under Chapter 7 bankruptcy, your assets will be sold off to satisfy your creditors. This can include your home. You will pay fees as well, including about $300 to the court, plus lawyer's and other fees.
- While Chapter 7 bankruptcy, Cohn notes, is probably the best option if you have lost your job, Chapter 13 bankruptcy might work better if you are employed. It is your only choice if you earn more than the median income and/or you would like to include tax debt, child support or student loans. Under Chapter 13, you must abide by a court-approved payment plan that will satisfy your debts over three to five years. By opting for a Chapter 13 filing, you might be able to save your home as long as you make all mortgage payments on time during your plan.
- Before deciding to file for bankruptcy, you should consider alternatives, according to Starla L. Green-Ivey, Ph.D., a professor in the University of Missouri's Personal Finance Planning Department. She suggests consulting a reputable consumer credit counseling service to discuss your options. Alternatives to bankruptcy include a debt management plan. This is an arrangement where your credit counselor negotiates a payment plan with your creditors in exchange for benefits, such as a reduction in your interest rate or removal of late and over-the-limit fees. Green-Ivey also believes you should look into a debt consolidation loan, which is usually secured with equity in your home.
