Types of consumer bankruptcy
- In Chapter 7, you do not repay some or all of your debts. Instead, the Bankruptcy trustee gathers and sells your nonexempt assets and distributes the proceeds to creditors. What is considered exempt property in a Bankruptcy case varies from state to state, but it usually includes necessary clothing and household goods, and a portion of equity in your home and car. Many who are in financial distress have only exempt property and therefore need not forfeit any of their assets.
- In Chapter 13, you pay off all or some of your debts over a three or five year plan and you do not forfeit any of your assets. Chapter 13 is usually the appropriate solution for homeowners who have past due mortgage payments and want to keep their homes.
Effect on your credit
Under the Fair Credit Reporting Act, credit bureaus can report your bankruptcy for up to 10 years after the date of filing. The major credit bureaus usually list Chapter 13 filings for the 7 years and Chapter 7 filings for the entire 10 years. Bankruptcy, however, is not the end of your ability to obtain credit. Although the interest rates that you will be charged will be high, creditors will most likely be willing to extend you credit because your debts have been wiped out (especially after a Chapter 7) and since you have just filed bankruptcy, you arent eligible to file again anytime soon.
Alternatives to bankruptcy
- Debt settlement (either negotiating with your creditors on your own or hiring someone—an attorney or non-attorney—to do it for you)
- Loan modification
- Home equity loan
- Do nothing (you only do this if you have no assets, do not want to acquire any assets (including the lottery or inheritance), do not mind having 25% deduction from your paychecks through wage garnishment and do not care about your credit rating).
- Continue making minimum payments and make little or no reduction to the principal balances owed (basically be a indentured servant to Visa and MasterCard)
- Borrowing against pensions (who wants to retire, right? Withdrawing from your pension or retirement to pay your unsecured debt would be a shame because both types of accounts are protected in bankruptcy)
- Withdrawing from your retirement accounts (again, this would be a shame)
- Borrow money from friends and family
- Get a second job