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Medical bills, family emergencies, job loss and taking on too much debt may lead you to consider filing for bankruptcy.
Bankruptcy has long-lasting implications for your credit. A bankruptcy will stay on your credit report for 7 to 10 years, which makes it harder for you to borrow money and seriously impacts your financial reputation. (Remember: in addition to banks, landlords, employers, and others can—and often do—look at your credit score.)
It’s not the end of the world and it may be the right choice for you, but first, see if these steps can help you avoid bankruptcy and get back on solid financial footing:
- Talk to the people you owe. At the first sign of trouble, call your creditors, explain your situation and see what other options you may have. You may be able to negotiate a payment plan, or they may consider other options to help, like reducing your interest rate or waiving fees. Don’t ignore calls, e-mails, or letters from creditors—it can seem intimidating but they can help you deal with your debt.
- Avoid taking on any new debt.
- Non-profit financial or credit counselors can help you develop a plan, talk to your creditors and help negotiate smaller payments. They charge low or no fees and usually handle only unsecured debt, rather than secured debt, which is debt attached to property, such as your mortgage or car loan. To find a reliable non-profit counseling agency, ask for a reference from your bank or local department of social services, The National Foundation for Credit Counseling, www.nfcc.org, or the Association of Independent Consumer Credit Counseling Agencies, www.aiccca.org. Compare charges and choose a service you are comfortable with.
- Avoid firms that charge a percentage of your debt, or that give you a hard sell.
If all else fails, bankruptcy may be the answer
Bankruptcy can have a long-lasting impact on your credit and should always be a last resort. The purpose of bankruptcy is to give you a fresh financial start, but you need to know what you’re getting into and what to do to rebuild your financial life on the other side.
There are two main types of personal bankruptcy:
- Chapter 7—Frees you from consumer and medical debt and protects you from harassing creditors. You may be allowed to keep your home or car if payments are kept current. It does not free you from certain kinds of debt, including mortgage or other secured debt, unpaid child support or alimony, unpaid taxes or student loans. A bankruptcy filing will stay on your credit report for up to 10 years, and you can’t file another Chapter 7 claim for eight years.
- Chapter 13—Also called a Wage Earner Plan. It is designed for people who have too much income left after household expenses are paid, or who have fallen behind on secured debt, such as a mortgage or car payment. Under this plan, you keep your property and are protected from creditors while you start a court-approved plan to repay at least part of your debt over three to five years.
Under both types of bankruptcy, you’ll be required to receive budget and credit counseling. To get more information about your state bankruptcy requirements by zip code, along with an on-line calculator to determine which type of bankruptcy you qualify for, go to www.legalconsumer.com.
Bankruptcy laws differ from state to state and it’s a complicated process, so it’s a good idea to get advice from an attorney who specializes in bankruptcy.
- Check your credit report regularly. Make sure the information is accurate and that your past debts have been taken off your reports.
- Re-think your financial habits. While it’s not always the case, if over-spending helped lead you to bankruptcy, make a change. Start budgeting and living within your means.
- Save. Build up an emergency fund to make sure you’re better prepared to handle potential emergencies and challenging times in the future.
How would you pay for an emergency?1
- 60% Pay cash
- 51% Borrow from family/friends
- 29% Take out a loan
- 25% Credit cards
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This site is for education purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional.
Source: Prepared for The National Foundation for Credit Counseling by Harris Interactive Inc., Public Relations Research, 2010